Entrepreneurship, Second Edition

11.5. Sources of Short-Term Cash: More Payables, Less Receivables

Entrepreneurs usually don't have all the cash they need all the time. Very often an entrepreneurial firm needs to build up its inventory, thus reducing cash levels. Or an entrepreneur's customers may place unusually large orders, thus increasing accounts receivable financing or reducing company cash levels. This section describes the many ways entrepreneurs obtain additional short-term cash to restore their cash balances to the required levels.

As a rule, entrepreneurs look for short-term cash at the lowest possible rates. For example, an entrepreneur faced with a cash shortage might look first to her company's suppliers because they extend credit to the company by collecting for goods and services after supplying them. The entrepreneur can enlarge this credit by paying bills more slowly—and also obtain additional cash by collecting from her customers more quickly.

11.5.1. Cash from Short-Term Bank Loans

Although supplier financing is convenient, it is often cheaper to pursue bank financing if possible. Entrepreneurs faced with a severe cash shortage may also try to convert into cash two of their working capital assets: accounts receivable and inventory. An entrepreneur may pledge her accounts receivable to a finance company in exchange for a loan, or she may sell them to a factoring company for cash. Similarly, an entrepreneur may pledge her inventory (often using a warehousing system) in exchange for a loan. ...