There are a lot of people offering a lot of useful—and not-so-useful—advice about weathering the storm created by COVID-19 and the economic downturn. They talk about marketing efforts, restructuring lease agreements and debt, or moving business online.

You might be forgiven if you read such articles and think: “That’s all very well and good, but I need money and I need it now!” Without the usual numbers of customers, many small to mid-sized businesses are struggling just to keep the lights on. It’s a frustrating situation. Plenty of small businesses know that they can be viable…if they can just survive the pandemic-induced dry spell.

If your company is in dire need of an immediate cash infusion, you can consider three different ways of obtaining it: applying for grants, institutional borrowing, or borrowing from clients (or your future earnings). Each method has its advantages and disadvantages.

Government Grants

The 800-pound gorilla in this category is the Paycheck Protection Program (PPP), which offers forgivable loans to small businesses. Administered through the US Small Business Administration (SBA), PPP was set to close at the end of June, but has re-opened, with additional funds available to be disbursed. The new deadline for applications is August 8. States and local municipalities often have grant programs as well for small businesses—including some that are designed to help minority- and women-owned businesses.

Pros: The money does not need to be repaid and there is no personal guarantee required. Need we say more?

Cons: Yes, there are some disadvantages. The biggest is that the government support comes with restrictions on how you can use the funds. PPP, for example, requires that the money be used for payroll or a few other expenses. If the funds are not used for the specific expenses, you will need to pay back the money. There may also be additional reporting requirements.

Borrowing From Institutions and Banks

The Economic Injury Disaster Loan (EIDL) program from the SBA usually awards loans to businesses in areas struck by disasters such as floods or wildfires. However, the entire US has been declared a disaster zone in the face of COVID-19, so any small business may apply.

Another option is obtaining a personal or business loan from a bank. Interest rates are low right now, so it’s a good time to borrow money.
While there are times when it is not prudent to do so, there may be some merit to borrowing with a credit card to tide you over until your business is back on its feet.

Pros: The funds may be spent on business operations with fewer restrictions on the types of expenditures than the grants.

Cons: You will be incurring interest charges, although the EIDL loans have a relatively low rate. Of course the interest rate on credit cards is particularly high so the cost of any credit card borrowing should be weighed against the benefits. You run the risk of not being able to pay back any loan if your business situation worsens.

Borrowing from Clients

No, you’re not going to ask a well-heeled client to spot you $100, but there can be strategies to encourage customers to pay up front and secure the business.

One way is to offer them a product or service in exchange for committing money upfront—for example, with a whiskey-of-the-month or beer-of-the-week program. If you provide memberships to an exclusive club, you could offer a discount to customers who pre-pay membership fees early. In addition to providing recurring revenue, such offerings also help encourage loyal customers.

A plan like this might sound like small potatoes, but remember that the timing of payments is important. If you collect money at the beginning of the month for something you deliver at the end of the month, you get to use that money in between. That difference can help keep your business afloat.

Pros: You don’t have to pay the money back.

Cons: You run the risk of pre-selling a product you can’t deliver for reasons beyond your control (another shutdown, for example), requiring you to refund the money. You should also avoid the gift-card trap. If you collect a lot of money now for gift cards that customers will use in the future, that can create an obligation that you will have to fulfill at some point (displayed as a debt obligation on your books).

Taking money is a lot like going into battle; you shouldn’t get started without having an exit plan. That is why it’s important to be very careful about what you are borrowing, how you are borrowing, and how much you are borrowing. Above all, it is crucial to have a repayment strategy in place.

DistilleryCFO is here to help you weather this storm! Contact us to learn how we can help with innovative strategies for your company.

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