Typically a ROBS works like this: You pay a fee to a plan sponsor to create a corporation, which sets up a profit sharing or 401(k) plan of its own. Then you roll funds from your own 401(k) plan into the newly created corporation’s plan. Your next step is to use the funds in the corporation’s plan to buy the stock of your new company, thereby providing working capital for your new business.

Sound too good to be true? It probably is. For one thing, profit sharing plans, while a legitimate way to reward employees by sharing profits from your business, must follow strict rules. These include filing annual tax returns and avoiding transactions that discriminate in favor of highly paid employees, including yourself. The IRS scrutinizes ROBS very closely to be sure all the rules are carefully followed.

When you’re looking for capital to set up a new venture, the idea of tax-free cash is appealing. But if the IRS determines that the deal is a prohibited transaction, you can be hit with penalties and risk losing your retirement money.

Please contact us before you enter into any complicated, questionable arrangement. We’re here to help you make the right choices for your business.

2.  Set up a cash flow budget. You need to focus on forward planning to generate a “best guess” about likely future sales and expenses. There are some cash flow software tools around, but you can also set up your own program in Excel.  If you’re not familiar and skilled with Excel software, ask your accountant for help to set it up properly initially. They can also help you select suitable cash flow software.

3.  Review and update cash flow budgets regularly. It’s your best insurance against potential cash shortages. If your business has a predictable cash flow, then cash flow budgeting on a quarterly basis is often enough. If you’re already visiting your accountant for other tax related matters, then you can get a cash flow budget prepared at the same time. The rule of thumb is that the greater the cash flow uncertainty a business faces, the more often a new cash flow budget should be prepared.

If cash is really tight, you might need to move to weekly projections, and decide which invoices you’ll pay and whom you need to get payment from as soon as possible. Watch bank balances and make sure you don’t have checks sitting on a desk waiting to be deposited. This can be time consuming, but you won’t be the first business that has had to do that from time to time.

Rapid growth sounds good but, ironically, too much of this good thing can bring on a cash crunch – which takes many business owners by surprise. A sudden spurt in sales is often accompanied by a run down in stock in-hand and debtors not being tracked or followed up when they go overdue. Strong sales one month often means a cash shortage next month. By monitoring the business’ cash status you can arrange credit from suppliers and banks to cover the temporary shortfalls. However, these arrangements take time to set up so you need to be prepared in advance.

4.  Set your credit terms carefully. If the nature of your business requires offering credit, then it is important to set clear limits to your terms of credit.

5.  Get payments in quickly. Master the art of debtor management. Let debtors know how much time remains before due dates. Stay in close touch with major debtors as payment deadlines approach. Offer small discounts for early payment as an incentive.

6.  Pay your creditors strategically. Take advantage of credit terms and prioritize payments according to the consequences involved in going overdue. Wages, taxes and direct debits are at the top of the list for on-time payment; key suppliers may be prepared to wait a while to keep your business. Don’t pay early just to get a discounted price unless getting the discount is better than being without the cash.

7.  Plan for the lumps. Be aware of when lean cash flow patches are coming up and plan accordingly. Avoid funding major purchases from your business’ working capital unless you are sure you have the cash to cover it.

8.  Get finance products working to your benefit. Overdrafts, premium funding, lease facilities and cash flow funding products can all be excellent tools to help match a business’ cash supply with planned outlays. Even the business credit card can be a good way to ease the squeeze as long as you are sure the debt can be paid before interest kicks in.

9.  Don’t incur tax and other statutory penalties. Save yourself the money and the stress!

10.  Keep your hands out of the till. Make cash drawings for personal purposes according to conservative cash flow forecasts.

Asset-Based Finance

Companies that are unable to secure traditional bank funding can turn to asset-based finance to cover their needs. With asset based finance, a company uses its assets as collateral to secure structured working capital or term loans. If the business is unable to repay the loan, the lender takes the asset that secured the loan. Asset-based loans can be secured by a range of assets including machinery, equipment, accounts receivable, inventory or real estate. In its most basic form, asset-based financing involves tangible assets. A business can pledge one or more its assets as collateral to secure a loan. Once the loan is repaid, the lender no longer has a claim on the asset.

Factoring

With factoring, a business sells its accounts receivable at a discount to a third party, called a factor. The business receives its funds immediately. The factor takes ownership of the receivables and assumes the right to collect on them and takes on the risks of non-payment. Factoring is not a loan, so the factor isn’t concerned with the firm’s creditworthiness but looks at the quality of its accounts receivable. The main drawback for the business is that it doesn’t receive the full value of its receivables. This amount forfeited can be high in percentage terms when compared to traditional forms of finance.

Invoice Discounting

Firms wanting to improve working capital and cash flow positions can use invoice discounting, also called debtor finance, to borrow a percentage of the value of the their receivables. Under these arrangements, the business gets access to a revolving line of credit (sometimes up to 90% of the value of outstanding invoices) which it can draw upon. For the service, the lender charges fees and interest on the amount borrowed

Like an overdraft, the business only pays interest on the funds borrowed. In most cases, confidentiality is maintained so that customers and suppliers don’t know the business is borrowing against its receivables.

The main drawbacks of invoice discounting are its high cost compared to other finance options and the loss of the company’s flexibility to make other finance arrangements once receivables have been dedicated as collateral. Businesses can start to rely on the improved cash flow invoice discounting brings and may find it difficult to leave the arrangement.

Merchant Cash Advances

A growing number of businesses needing a quick solution to cash flow challenges are turning to merchant cash advances (MCAs), a new and controversial form of finance. Merchant cash advance providers offer businesses a lump sum payment in exchange for a share of future credit card sales. This form of finance has become popular among retail, restaurant and service companies that have strong credit card sales but have poor credit ratings and little or no collateral.

Under an MCA arrangement, the provider collects a set percentage of the company’s daily credit card sales until they recover the amount they advanced plus a premium. The advantage for the business is quick access to funds without the need for a strong credit rating or collateral.

The main drawback of MCAs is their high premiums, which can be over 30% of the money advanced. This has led some to refer to MCAs as ‘payday loans for businesses’. Unlike traditional lenders, MCA providers don’t fall under finance regulations because they are buying receivables, and not making loans.

Tight credit markets and stricter lending criteria have made it necessary for companies to look at alternative forms of finance. Although these can offer benefits, they need to be scrutinized for their potential shortcomings.