Should You Tap Your 401(k) to Start Your Business?

It sounds so easy. In this time of tight credit, you can still finance a new business or franchise by rolling your retirement funds into your new company. You pay no income taxes or early withdrawal penalties, avoid debt and have money available immediately to rent a space, pay a franchise fee, hire employees, buy equipment and pay yourself a salary. And this is all sound, the firms that arrange these rollovers say, because they are "based on long-standing provisions of the Internal Revenue Code."

For thousands of startups, these rollovers are working. Last year, 4,050 businesses--60 percent of them franchises--were launched with retirement rollover money, according to FRANdata, an independent research firm. These new entrepreneurs started ventures that range from data processing companies to flower shops, created more than 60,000 new jobs and added $8.3 billion to the nation's economy. And the lingering recession, says Steve Rosen, CEO of FranNet, a franchise broker firm based in Louisville, Ky., is only making retirement rollovers more attractive.

"Bank credit is tight," Rosen says, "and housing values have dropped so much you can't get a home equity loan. These rollover plans let you invest in yourself instead of investing in the stock market."

Indeed, one of the early adopters, Gary Cote, used $60,000 from his 401(k) in 2005 to start Sunray Technology Ventures, a Palm Desert, Calif., provider of high-speed internet access to hotels. "I didn't want to borrow money or mortgage our home to the hilt," Cote says. "Using my retirement money gave me independence. We've been profitable since 2007 and had revenues of $2.2 million last year. I have 10 employees, and I can't say enough about the scenario that allowed us to provide for all these people."

Although the mechanism for rolling retirement funds into business startups has been available for decades, the practice began in earnest in 2000, when industry founders and former business associates Leonard Fischer, now CEO of BeneTrends Inc. of North Wales, Penn., and Steven Cooper, now CEO of SDCooper Co. of Huntington Beach, Calif., introduced the concept at the annual convention of the International Franchise Association. "We were the hit of the show," Cooper says. Rollovers gained momentum during the early 2000s but fell out of favor during the boom years before the current recession, when credit was easily available.

Today, they are so popular that Rosen estimates 35 percent to 40 percent of all new franchisees recruited through his broker network last year tapped some or all of their retirement funds to get started. So far, an estimated 10,000 small businesses and franchises have been launched nationwide with retirement money.

But if you're considering joining them, you should be aware that retirement rollovers are not as simple as they sound. Obviously, you are putting your nest egg in jeopardy. Less obviously, you are also agreeing to pay a rollover plan provider an annual fee for the life of your business and, some tax experts warn, risking increased scrutiny from the Internal Revenue Service. Although few rollover plans have been questioned until now, the IRS has signaled that it may begin looking at them more closely.

The "long-standing provision" behind these plans is ERISA, the extremely complicated and easy-to-violate Employee Retirement Income Security Act of 1974, which enables employees to be responsible for their own retirement plans.

The three main administrators of rollover plans--SDCooper, BeneTrends and Guidant Financial Group Inc., of Bellevue, Wash.--have tweaked ERISA rules into a neat three-step program. You pay one of them a fee of about $5,000 and it'll do the rest: Move your current 401(k) or IRA (self-directed IRAs are not eligible) into an ERISA profit-sharing plan, which then becomes the retirement plan for your new company. That plan buys up the stock of your new C-corporation. Once the funds have transferred, they become tax-free capital for your business. In essence, you are spending the money on your own corporation instead of for stock of another company, such as General Electric or Goldman Sachs.

"You then open a corporate checking account," Cooper says, "and pay yourself back for whatever you've spent money on and pay our fees." Like the other providers, Cooper charges an annual fee--$800 to $1,440 a year--to file documents required by the IRS to make sure your new "retirement plan" remains safely qualified.

Because maintaining the plans is complicated and expensive, you may think that only people who have no other options for financing a business are using them. But a FRANdata survey of about 500 of BeneTrends' 3,077 active clients shows that many of them are far from desperate. In fact, 89 percent of respondents have college or postgraduate degrees, and 60 percent of them used other sources in addition to retirement money to fund their businesses. Almost half of them were able to finance their investments by using only a portion of their retirement plans, and one-third tapped into only 10 percent to 30 percent of their assets.

But a contingent of CPAs, tax attorneys and pension experts, including Stephen Dobrow, immediate past president of the American Society of Pension Professionals and Actuaries and president of Primark Benefits in San Francisco, is concerned that the IRS is about to crack down on both rollover plan promoters and their clients.

"These plans are operating in a gray area, and I'm afraid they'll come back to bite their users in the butt," Dobrow says. He points to an IRS memorandum, issued in October 2008 by Michael Julianelle, director of employee plans, that calls such plans "ROBS" (Rollovers as Business Startups) and begins, "Although we do not believe that the form of all these transactions may be challenged as non-compliant per se, issues such as those described within this memorandum should be developed on a case-by-case basis."

The 15-page memorandum shows IRS auditors the ways ROBS plans can slip out of compliance. These rollovers are legal only because they exchange one type of retirement plan--your 401(k)--for another, the profit-sharing plan set up in your new business. You are the custodian of that plan and, therefore, must follow strict ERISA rules, which you can violate by not offering eligible employees participation in your new retirement plan, not filing proper reports with the IRS, filing a report with an improper valuation of the stock owned by your corporation's retirement plan, or by not diversifying the plan's investments. If the IRS finds you have violated ERISA rules, you could have to pay taxes and penalties on the money you took out of your 401(k), plus additional fines.

Compliance is easy when starting out, when you are the only employee and the stock value is low. In the BeneTrends survey, almost three-fourths of clients have only one to three employees. Of the rest, 14 percent employ seven or more, and 3 percent have 21 or more workers. Half of all clients' employees participate or plan to participate in their employers' retirement plans, and the IRS wants to make sure the plans are viable.

Melissa Labant, tax technical manager for the American Institute of Certified Public Accountants in Washington, D.C., says the memorandum "is as strong a warning as the IRS can give. They don't come out with this type of guidance often and it could mean they are preparing to audit many of these plans."

Dobrow notes that the IRS expressed concern about another ERISA twist a few years ago involving insurance policies, "then threw the book at everyone and imposed fines of hundreds of thousands of dollars. I believe ROBS are in the next wave."

But BeneTrends co-founder Fischer calls that IRS memo "the best thing that ever happened to us."

"It showed us how to comply with the law," he says. "Our business doubled the following year."

Benetrends' outside attorney, Kathleen Nilles of Holland and Knight in Washington, D.C., says she, too, sees the memo "as a road map for how to do this right. Although it's stated negatively--'This is how we catch people'--it lays out what i's to dot and t's to cross in this very complicated area of the law."

All the major plan promoters promise to help out if you are audited; one even guarantees that it will pay all fines and legal fees should the IRS rule against you. So far, the 10,000-plus ROBS in existence have drawn only a handful of IRS audits, and most of those ended well for the business owners, the plan providers say.

But Randy Gegelman, a tax attorney with Faegre and Benson in Minneapolis, Minn., warns, "The IRS goes in waves. When they find a practice, they spend time understanding the scope of it and then begin active challenges, which I expect will be their next step. These arrangements are intended to be used for retirement investment, not seed money for your business."

The IRS would not comment directly on whether it anticipates a crackdown on ROBS. "I can say the memo is still on our website and we point people to it," says IRS spokesman Dean Patterson.

Cote isn't worried, because his rollover started both a business and a rich new retirement plan. He opened his Sunray retirement plan to his employees (six of the 10 contribute) and moved some of its funds into stocks and bonds. He hires professional appraisers to evaluate the assets in his plan, and every year his provider, Guidant, helps him file detailed reports with the IRS. "My own retirement plan," Cote says, "is worth substantially more than the $60,000 that was in it five years ago."

Top Five Leadership Mistakes, and What to Do About Them

There isn't an entrepreneur or small-business owner among us who couldn't learn from Eisenhower's words. Indeed, one of the well-known thought characteristics of an entrepreneur is, "If you want something done right, do it yourself." It is just that type of thinking that gets small-business owners in trouble.

Along with not delegating work, what are some of the most common management and leadership mistakes an entrepreneur of a growing concern makes? And once these mistakes are made, can an owner recover? We asked several leadership experts for their opinions, and while most of them consult on behalf of large corporations, many of the leadership hazards they discussed are the same regardless of organization size. Here are some examples of the kind of thinking that can get entrepreneurs in trouble.

'It's all about me'

In many cases, entrepreneurs "are so passionate about their company that they lose perspective and blend who they are with their business," says Gary Schuman, president of CDL Consulting, a leadership change management consulting firm in New York City and Baltimore. Because the owner's ego is in the way, it becomes challenging for the entrepreneur and his or her management team to do what is necessary to grow the company. Every once in a while, he or she "needs to really assess what is working and what isn't working," says Schuman.

He suggests getting some informal feedback from others who run companies, as well as sitting down with employees and asking them what gets in the way of doing their job. Or better yet, hire a coach on a short-term basis to help become more aware of your strengths and weaknesses as a leader, suggests Amy Abel, director of leadership development for a Fortune 500 firm.

'No one does it better than I do'

This gets back to the inability to delegate. It's understandable, given that entrepreneurs usually "start from nothing, begin as the focus of control on all key decision-making processes," says Abel. But it is essential, she says, that a small-business leader become "more of an influencer instead of a control person." To that end, owners need to begin to trust others and "spend time developing the people around them so that they can step into roles that are stretches for them," says Christine Wahl, director of the Georgetown University Leadership Coaching Certificate Program.

'My vision is to stay in business'

Too often, small-business leaders are so involved with doing the day-to-day task work that they can't find the time to create a strategic vision about where they need to take the business, says Wahl. It becomes a question of focus: output versus outcome. "They don't take the time to slow down and reflect, but rather get hooked on the adrenaline of running the business," says Wahl. This goes back to the importance of developing talent and delegating so that the small-business leader can do just that: lead.

'My idea is the best idea'

Small businesses grow up around the strong personality of the entrepreneur, which often means "a hierarchal work environment that teaches employees to be reactive rather than proactive," says Schuman. In these workplaces, employees don't really say what they think. "You get their head but not their heart -- and you want their heart," he says. To avoid this type of culture, small-business owners need to establish a high level of trust, with two-way communication and very clear roles and responsibilities. Employees need to feel they can make suggestions and decisions and have some measure of control. "Perhaps a drop box that proactively solicits ideas of how to improve the organization so that it doesn't all concentrate on the owner," says Abel.

'I don't need to learn how to lead'

One of the hardest lessons to learn is that being an effective leader doesn't often come naturally. Many people need help learning how to lead. "A certain level of reinvention is needed, because what you have always been great at may no longer be needed" as the company grows, says Wahl. That is why getting an outside opinion -- from peer-to-peer mentoring, networks of other business owners, or a coach -- can help entrepreneurs develop the necessary skills to lead and manage effectively with the goal of reaching the next level of growth.

How to Find Your Angel Investor

As a rule, angel investors are wealthy people who like to bet on early-stage startups.
They offer first-round financing, bridging the gap between bootstrapping and institutional capital, with the hope that their high-risk seed money will return big rewards.

Numbering about 260,500 nationwide, according to Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire, angels work on their own or by joining private networks that pool money, share expertise and divvy the due-diligence tasks.

The range of individual investments runs from $10,000 to $1 million, with deals typically between $25,000 and $100,000. Group or network ventures usually run $250,000 to $750,000 each.

Who are these angels?

Jeff Pulver could be the angel poster child. Trained as an accountant and bonds trader, he began investing in emerging Internet technologies more than a decade ago, notably as co-founder of Vonage, the VoIP phone service. "I have a history of getting involved early in such markets," says Pulver, who's also poised to reap the benefits of his early bet on Twitter--the social networking company has recently been valued at a staggering $1 billion as it hurtles toward a public offering.

How to search for an angel

Your first stops should be the two best online listings of active angel individuals and networks in the U.S. and Canada: the Angel Capital Association, a professional alliance of 330 angel groups, and the Angel Capital Education Foundation, a nonprofit supported by the Ewing Marion Kauffman Foundation, which lists about 200 angel networks. For background data, average deal sizes and profiles of angel characteristics and demographics, head to the Center for Venture Research website.

How to pitch an angel

Once you've identified a likely individual or network, invest in some research. Work your contacts to learn what makes the angel tick. Why does he or she invest? How does the network operate? What kinds of investments have they made in the past, and what were the results?

The idea is to audition the potential fit so you don't waste time or resources (either yours or theirs). If it looks right, the next step is to get acquainted. "The best-case scenario is when two or three people have already spoken to an angel on your behalf before you contact them," says Connie Wright, Boston-based managing director at Accounting Management Solutions, an outsourcing service for small businesses.

What your pitch should emphasize

The real skinny on what gets angels juiced, says veteran angel and former banker John O. Huston, is all about potential return. What that means, according to Huston, is that angels look for opportunities to make four times their investment within three years.

Sporting a long resume of structuring private companies, and now chair of the Angel Capital Association and founder of Ohio TechAngels, the second-largest angel fund in North America, Huston says it's rare for angels to hear entrepreneurs focus on their exit or rate of return--yet that's the key.

Be honest and up front about your business

If you do head out to find an angel, the smart approach is to be honest and realistic, whether you're describing valuations, risk-rewards or your company's competitive set.

Don't forget: Angels are investors who typically have started and sold companies themselves. They've truly been there and done that.

Self-Financing Your Startup

Once you have decided on the type of venture you want to start, the next step on the road to business success is figuring out where the money will come from to fund it. Where do you start?
The best place to begin is by looking in the mirror. Self-financing is the number-one form of financing used by most business startups. In addition, when you approach other financing sources such as bankers, venture capitalists or the government, they will want to know exactly how much of your own money you are putting into the venture. After all, if you don't have enough faith in your business to risk your own money, why should anyone else risk theirs?

Begin by doing a thorough inventory of your assets. You are likely to uncover resources you didn't even know you had. Assets include savings accounts, equity in real estate, retirement accounts, vehicles, recreational equipment and collections. You may decide to sell some assets for cash or to use them as collateral for a loan.

If you have investments, you may be able to use them as a resource. Low-interest-margin loans against stocks and securities can be arranged through your brokerage accounts.

The downside here is that if the market should fall and your securities are your loan collateral, you'll get a margin call from your broker, requesting you to supply more collateral. If you can't do that within a certain time, you'll be asked to sell some of your securities to shore up the collateral. Also take a look at your personal line of credit. Some businesses have successfully been started on credit cards, although this is one of the most expensive ways to finance yourself.

If you own a home, consider getting a home equity loan on the part of the mortgage that you have already paid off. The bank will either provide a lump-sum loan payment or extend a line of credit based on the equity in your home. Depending on the value of your home, a home-equity loan could become a substantial line of credit. If you have $50,000 in equity, you could possibly set up a line of credit of up to $40,000. Home-equity loans carry relatively low interest rates, and all interest paid on a loan of up to $100,000 is tax-deductible. But be sure you can repay the loan--you can lose your home if you do not repay.

Consider borrowing against cash-value life insurance. You can use the value built up in a cash-value life insurance policy as a ready source of cash. The interest rates are reasonable because the insurance companies always get their money back. You don't even have to make payments if you do not want to. Neither the amount you borrow nor the interest that accrues has to be repaid. The only loss is that if you die and the debt hasn't been repaid, that money is deducted from the amount your beneficiary will receive.

If you have a 401(k) retirement plan through your employer and are starting a part-time business while you keep your full-time job, consider borrowing against the plan. It's very common for such plans to allow you to borrow up to 50 percent of your vested account balance up to a maximum of $50,000. The interest rate is usually 1 to 2 percent above prime rate with a specified repayment schedule. The downside of borrowing from your 401(k) is that if you lose your job, the loan has to be repaid in a short period of time--often 60 days. Consult the plan's documentation to see if this is an option for you.

Another option is to use the funds in your individual retirement account (IRA). Within the laws governing IRAs, you can actually withdraw money from an IRA as long as you replace it within 60 days. This is not a loan, so you don't pay interest. This is a withdrawal that you're allowed to keep for 60 days. It's possible for a highly organized entrepreneur to juggle funds among several IRAs. But if you're one day late--for any reason--you'll be hit with a 10 percent premature-withdrawal fee, and the money you haven't returned becomes taxable.

If you are employed, another way to finance your business is by squirreling away money from your current salary until you have enough to launch the business. If you don't want to wait, consider moonlighting or cutting your full-time job back to part time. This ensures you'll have some steady funds rolling in until your business starts to soar.

People generally have more assets than they realize. Use as much of your own money as possible to get started; remember, the larger your own investment, the easier it will be for you to acquire capital from other sources.

From Concept to Market--in 10 Months Flat

While traveling, Magnus Hammick often wanted to listen to loud, crisp music from his iPhone, but something was missing. The products he and his friends tried just didn't produce the sound they were looking for--and were too big to carry around. He decided to take matters into his own hands. In late 2009, Hammick developed a pocket-sized speaker that delivers room-filling sound with amplified bass when it's placed on a flat surface. The $80 WOWee ONE connects to anything with a 3.5-millimeter audio jack and has a rechargeable battery with 20 hours of play.

"People don't just sit around in a white room and think up new products," says Hammick, who spent the past 18 years as a product developer. "The best ideas always come straight from the real world."

Since the product's launch about nine months ago, more than 150,000 WOWees have been sold. It's earning critical acclaim from the likes of The New York Times and can be found at many major online retailers, such as Amazon.com and Buy.com. But the road getting there wasn't always easy. Before Hammick even considered moving forward with his concept, he had to step back and seriously evaluate the need for a bass-thumping travel speaker in the marketplace and decide if his idea was fundamentally different.

The Legal Stuff

Hammick had attorneys on board from day one to ensure he acquired all of the appropriate rights from his tech partner, SFX Technologies--which actually owns the patent on the audio technology used to create the WOWee. However, Strouss from ASOI says hiring legal help right away is not always necessary. He suggests that people approach an invention like any other investment--as a risky venture.

"Don't spend any money until you've determined that there is a likely return greater than the investment," Strouss says. "There's an appropriate time to hire an attorney, and when you do your homework it will become apparent when that is for your situation."

From Premise to Prototype

Hammick's next step was to partner with SFX Technologies to create a working prototype. SFX already had the appropriate technology developed--it was just a matter of implementing it into Hammick's practical, mass-market vision.

"I always feel slightly uncomfortable when people call me the inventor of the WOWee because I really just developed the product to fit with SFX's existing technologies," Hammick says. "There's no such thing as a completely brand new idea--everything comes from many sources."

Hammick's modesty aside, after several versions, a working prototype was born. In a mere 10 months, the WOWee ONE went from a hunch to a full-fledged, marketable product.

Impressing Investors

Hammick leveraged the staggering statistics on the growth of smartphones and other mobile devices like the iPad to lure investors. Though this often can be an inventor's greatest challenge, Hammick was quickly able to secure capital from private backers. "The funding is always easier if the product is good," he says.

Most people don't have the money to fund an invention on their own, Strouss says, and investors typically need to see proven results before investing in a new product. "It's very challenging to get someone to fund something they don't understand the need for. This is where the inventor puts on the entrepreneur and salesperson hats," he says. "Investors want to understand why this is a better use of their money than everything else they could invest in." Grants and loans are also good funding options--but they aren't secured overnight.

Strength in Numbers

For Hammick, finding good partnerships--from legal to manufacturing and packaging--proved to be the most complicated aspect of the invention process.

"Everyone loves our product, so our greatest challenge was selecting the best partners we could to take the product to market," Hammick says. "You want partners, not just suppliers. Inventors should spend the most time on securing a great partnership base."

The Moment of Truth

Once a manufacturer was nailed down to produce the WOWee, it was time to launch the marketing campaign. Hammick employed Brian Hollowaty, president of SoulR Products, to build brand awareness and retail distribution in North America. The first time Hollowaty saw the WOWee in action, he was blown away.

What You Need to Know About the Small-Business Bill

The Small Business Jobs Act is poised for a full Senate vote this week after amendments are approved as expected. The package includes plenty of goodies, including tax breaks and a $30 billion Small Business Lending Fund, but also measures that could have some small-business owners worried.
Before it becomes law, the bill must be resolved with the small-business legislation passed by the House of Representatives in June.

"We do expect the bill to pass on Tuesday night, but it still has a long way to go to become law," says Molly Brogan, vice president of public affairs for the National Small Business Association, a small-business advocacy organization in Washington, D.C

Still, the legislation has widespread support from a host of small-business interests and is expected to become law before midterm elections in early November. Here's a look at what the bill, if passed, could mean for your business, including the potential potholes that you could be facing down the road.

Small Business Lending Fund: You might have better luck getting a loan from a smaller lender. A Small Business Lending Fund would provide up to $30 billion in capital to financially sound small banks with less than $10 billion in assets to encourage them to lend money to small businesses. Participating banks would have an incentive to lend to small business: If they increase lending to small business 10 percent over the previous year, they would pay as little as 1 percent on the capital they acquire from the fund.

State Small Business Credit Initiative: This provision could help you out if you live in a state that has a successful small-business lending program and can show how your loan could help create jobs. States with such programs facing cutbacks due to tight state budgets may be eligible for funding to continue them. The grant pool would total $2 billion, but states would need to show that there has been at least $10 in new lending for every $1 in federal grant money they receive. In addition, they would be required to use their funding to work with private lenders to extend more credit to creditworthy small businesses and manufacturers who need the money to create jobs. The administration estimates that the $2 billion pool could generate $20 billion in new lending.

Support of Small Business Administration Lending Programs: If you've been seeking an SBA loan, you could stand to benefit from this measure. The bill would extend provisions that amped up SBA lending guarantee programs and fee reductions that recently expired. In addition, the bill would increase the maximum loan size for the SBA's 7(a), 504, and microloan programs. The 7(a) and 504 loan program maximums would bump from $2 million to $5 million and the microloans would increase from $35,000 to $50,000. Loans made under the SBA Express program would temporarily increase from $300,000 to $1 million. It also includes a temporary allowance for small-business owners to use 504 loans to finance certain mortgages to avoid foreclosure.

Tax Incentives: Startups, this one's for you. The bill would raise new-business expense deduction thresholds from $5,000 to $20,000 in 2010 and 2011. In addition, qualifying small-business investments -- primarily those in corporations with less than $50 million in gross assets and held for more than five years -- would be exempt from capital gains tax. The general business credit, which now can be carried back to relieve the previous year's tax liability, would be extended to a five-year carry-back.

Increased Deductions: Business owners would be able to write off the whole cost of acquiring property immediately instead of over time. For 2010 and 2011, this change to "Section 179 expensing," so-named for a section of the Internal Revenue Service code, would allow taxpayers to write off up to $500,000 in capital expenditures. Expenditures over that amount would phase out, up to a ceiling of $2 million. The bill would allow taxpayers to expense up to $250,000 of the cost of qualified improvements on leased property, restaurant property, and improvements to retail-business property. Business owners could also deduct the cost of health insurance for themselves and their families when calculating self-employment taxes.

Increased Export Support: Doing business overseas? The bill contains provisions that might help government agencies help you more. It would increase support to the Office of the U.S. Trade Representative, which plays a key role in promoting U.S. exports, creating staff positions there and at the Department of Commerce, while increasing funds to promote U.S. exporters and fund export grants available to industry associations and nonprofit organizations. The bill also would create the State Export Promotion Grant Program to support small, export-minded businesses and enhances efforts at the SBA to encourage export businesses.

How Your Startup Can Make Money Now

Beyond profit in a business, cash flow is king. For startups, establishing cash flow as quickly as possible is vital to keeping your operations going through your critical first year and beyond.
The key to maximizing cash flow in your business is to understand the things you can actually work on and measure, to create a clear target number or objective.

What's one of the first and easiest ways to immediately boost cash flow and profit? Simply drive your customers to your bestselling (or primary) product or service with the highest profit margin.
Beyond that, there are some other very simple ways to jumpstart cash flow from day one.
Here are five tips to enable you to make cash upfront while generating a customer list that will serve as a foundation for repeat business for years to come.

Deposits or pre-paid contracts: If you are in a service business, deposits or pre-paid agreements are a great way to generate cash flow upfront. You need to deliver on the back end, or else you won't be in business long.

If you have a product-based business, you could also do the same with pre-orders, with a percentage of the final sales price going to secure the order or a certain delivered-by date.

The key here is to get creative, as there are endless possibilities in making this model work for you.

Periodic "closed-door sales" for new customers or loyal customers: This is a great way to literally create a captive audience for your product--or service, if you set it up as a workshop, class or demonstration--in an environment you can control with a sales and pricing process you can direct.

For this event, "sale" doesn't need to mean "discount." Offering an exclusive, limited-time purchasing period for new customers (and in the future for loyal customers) is an incentive for them to get the latest, greatest, best or most innovative products--or those with the greatest value--before everyone else.

Shorter payment windows: Depending on your company, you could combine upfront payments with shorter terms, especially if you are in a service category. It's best to position the shorter terms as an offer, with something to act as an incentive for paying early.

You could offer a small discount for early payment, but a better option is a small gift or some other kind of added-value offer. You could also position this as both a thank you and an incentive to keep customers consistent with their shortened terms.

Frequent buyers' program--for a price: We've all been part of these programs, but some very effective programs can be created simply by charging $5 or $10 to be part of the club. While there may be some initial costs upfront on producing loyalty cards or customer tracking, the extra cash generated over time ends up going straight to the bottom line. Not only can you create a highly targeted list of better-qualified customers, but this is a simple way to easily generate cash quickly just by asking for it.

Test new, unique, price-conscious or bargain products at local markets: One way to generate cash flow while testing the market for any a unique, out-of-the ordinary or bargain-based product is to set up a location at a local market or swap meet. This is an inexpensive way to test the waters on a new product--or even a service such as massage therapy and the like, if local regulations allow it--and get paid for it.

Depending on your product or service (and the amount of foot traffic a local market generates), this tactic may even turn into a decent side business, as it's a great way to get income going on a low initial investment.
Once you get your company up and running, you can expand on these strategies and also look to increase your value adds at different buying, sales or customer contact points along the way. The key is to test and measure what works and what doesn't, because no strategy will work perfectly for you every time.