As a small business owner, you’ve likely found yourself in a situation where cash is tight. When you’re squeezed for cash, it can be difficult, if not impossible, to cover payroll for your staff, keep your shelves stocked, and keep operations running smoothly on a day-to-day basis.
A Few Ideas
Fortunately, there are several forms of business funding available that can help you survive a cash flow crunch. There are also some best practices you can implement to avoid the same situation moving forward.
Short-Term Loan
One option to finance your way out of a tough spot is to take out a short-term loan. With this loan, you can stay afloat through a slower period. Since they are designed to help you out quickly, they are generally smaller sums of money loaned out at interest rates of 10% or higher with repayment periods of 12 months or less. Most short-term loans come with factor rates, and a daily or weekly repayment schedule. This makes the annual rates of short-term loans more costly than longer-term business loans.
Business Line of Credit
If a short-term loan isn’t for you, you may want to look into a business line of credit. As one of the most popular choices of financing, business credit lines are known for being both flexible and fast.
They come with a maximum withdrawal limit set by the lender from which you, the business, can withdraw up to that amount as needed and pay that back. This is what sets them apart from a business loan, as you are only responsible for paying back what you need and use (plus interest), rather than a set lump sum.
Business Credit Card
There is also the option of opening a business credit card. This can offer almost instant access to funds in lieu of waiting potentially weeks for an approval, as in the case of traditional loans. With a credit card, like a line of credit, you only pay interest on what you use, and your available credit is restored when you pay back what you borrow. You are technically only required to make minimum monthly payments, but it’s best practice to pay back everything in full.Otherwise, you may find yourself in a downward debt spiral.
Invoice Financing (and Invoice Factoring)
Invoice financing is another route for funding your business, and is generally used if the root cause of your cash flow crunch is slow payments. It allows you to borrow against your accounts receivable (with outstanding invoices serving as collateral) in exchange for upfront cash.
Invoice factoring is similar but involves the sale of those outstanding invoices to a lender. The lender then takes over the process of collecting from your customers. Both options, however, should be used when you need cash, but accounts simply aren’t paying up.
Keep in mind that factoring rates and fees tend to be higher than those of traditional business loans. Additionally, most factoring and financing companies work exclusively with B2B businesses—so if you’re a B2C enterprise, this likely isn’t for you.
Merchant Cash Advance
A merchant cash advance is a quick means to an end. Because they are so instantaneous, the funds are unsecured, meaning you are free from having to forfeit any assets if the business goes under. There are no fixed terms, but they do generally come with APRs that can skyrocket quickly, so tread carefully. You may be on the hook for paying much more than expected.
Business Term Loans
With a business term loan, you borrow a lump sum of money which you pay back at fixed intervals over a predetermined period of time. Repayment periods for term loans can range from six months to as long as 20 years. And with a new crop of online lenders, you can now get funds in just a few days. This is opposed to the several months it can take with traditional banks or the SBA.
3 Other Tips to Help You Survive a Cash Flow Crunch
If financing isn’t the right route for your business, there are still other ways you can manage through a cash crisis.
1. Negotiate with Your Vendors
If you have a good relationship with vendors or certain suppliers, you may be able to ask for an extension of the due date. You may also be able to adjust payment terms moving forward. For instance, if you currently have 30-day terms, see if you can extend payables to 45 days, or even 60 days.
2. Evaluate Your Current Expenses
Take a look at your costs, and identify any miscellaneous expenses or “money leaks” that could be hurting your cash flow. Are there any services that you’re not using that you’re still being charged for? Facebook Ads that are not converting? Overpaying your accountant or insurance provider?
3. Reevaluate Pricing
How long has it been since you’ve evaluated your pricing structure? If inventory prices have increased, but you haven’t raised your prices in tandem, you could be losing money. Beyond direct costs, you also want to make sure you’re factoring indirect costs into the equation, which could include everything from accounting fees to office supplies. Additionally, check out how much your competitors are charging, and see where you stack up.
5 Tips to Avoid Cash Flow Crunches Moving Forward
As you recover from financial crunch, you will want to be proactive in avoiding a similar situation in the future.
Track expenses
The most straightforward way is to obsessively track your expenses. Knowing every little detail about what money you have on hand and what you are spending on will only make you be hyper-aware of where you stand financially. The more you know, the better prepared you are and the quicker you can make or reevaluate spending choices to save money.
Perform regular cash flow analysis and projections
You should also perform a cash flow analysis on a regular basis, which will help you identify trends in ebbs and flows in your cash reserves. Additionally, look ahead six to twelve months at a time and forecast where you want to be and where you expect to be, so you can budget more effectively and readjust your planning if it looks like you may be experiencing another slow period ahead.
Plan for seasonal ebbs and flows
And, in conjunction with that forecast, you should always be prepared for the seasonal ebbs and flows of money coming in. Customer spending fluctuates and so you should plan your expenses and financial forecasts around them.
For example, in the retail world, you should expect to see an uptick in incoming cash around the holidays and then a decrease right after. However, if you are providing professional services, plan differently. Most of your clients will be taking off around the holidays and thus causing a decrease in the capital coming in.
Incentivize customers to pay early
Lastly, you can stay ahead of the game by incentivizing your customers to make early payments. If you have a reliable stream of money coming in ahead of planned due dates, it will be much easier to stay afloat.
Establishing a standardized payment plan and then encouraging early payments, such as discounts or options to bundle bills, will increase the chances of customers making on-time payments and reduce the risk for less reliable customers to miss payments.
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