Running a business is exhilarating, no matter the industry or size of the company. And while business ownership comes with a slew of perks not found in the traditional 9-to-5 world, it has its drawbacks. Operating a successful business requires capital, and when sales are slow, the company is growing, or the business is just getting off its feet, cash flow is often a pressing concern.
The cash flow of any business fluctuates fairly consistently. Meaning some months or seasons are strong, while other phases make owners question their financial management abilities. The reality is all businesses face cash-flow issues from time to time, although some scenarios are more drastic than others.
Just under 30 percent of startup businesses fail due to cash flow problems, according to research by CB Insights. And up to 82 percent of all small businesses close their doors because of problems with lacking capital, according to a U.S. Bank study.
These financial issues aren’t often due to mismanagement, but they are instead the product of unexpected shifts in the market. And sometimes a product of a new competition, a decrease in seasonal demand, or overly rapid expansion of operations.
Regardless of the culprit, there are several ways to keep things afloat when cash flow dries up.
Collect Due Invoices to Avoid Cash Flow Problems
Many businesses operate on an accounts-receivable basis. Meaning they allow customers, qualified or otherwise, to make purchases or have services rendered on credit. Accounts receivable can be a great way to build customer loyalty and an ongoing pipeline of revenue coming in the door. But when customers fail to pay in a timely fashion, business suffers and cash flow problems arise.
Business owners can expedite the collection of accounts receivable in several ways, including implementing the right tools and processes from the start. First, the opportunity to pay overtime shouldn’t be extended to everyone. But only customers who have a track record of paying on time and in full.
Next, use an invoice tracking software or program to accurately monitor all amounts owed. Countless options exist for this type of assistance. Most allow the business to send automatic reminders for payment as the due date approaches. Having collections of accounts receivable on autopilot is often a necessary step in keeping cash-flow positive.
For business owners who have found themselves on a downward spiral of late payments from customers, engaging a professional agency to handle the collection of accounts may be the next smart step. This service comes at a cost, but having the backup can be a cash flow lifesaver. Business owners should take the time to review current practices for collecting late accounts as to avoid the use of an agency in the future.
Consider Alternative Staffing
Over the last few years, the growth of the gig economy has been a boon for independent workers who don’t want to be tied down by a traditional employment agreement. Although freelancers experience many benefits in going the gig route, business owners can take advantage of this recent trend to solve any cash flow problems.
Because freelancers are not employees of the business, the company has more flexibility with payroll and expenses. There is no cost for benefits, no additional taxes paid, or the often-hefty cost of biweekly payroll when business is slow. Tapping into the power of the freelance market means businesses can turn the flow of work on or off as they need it, giving a boost to the bottom line.
Options for Financing
In addition to the flexibility of freelance workers and getting a handle on accounts receivable, businesses can improve cash flow problems with the help of external financing. Each business financing option may be a fit for one company more so than the next, depending on several factors. Here are the basics.
Traditional Loans and Credit Lines
Just like individual consumers have options for borrowing money, so do businesses. Financial institutions, including banks, credit unions, and a new wave of online lenders offer loans and lines of credit specifically tailored to meet the cash flow needs of companies large and small.
A business loan works like a personal loan in that a lender offers a lump sum payment to a business in exchange for fixed monthly (or weekly) payments of principal and interest from the borrower. Nearly all business loans have a fixed interest rate and extended repayment timeframes, and rates typically range from as low as 5 percent to as high as 100 percent. However, business loans are only available to business owners who have a strong financial history. Also, steady financial statements are required, and in some cases, a personal guarantee from the borrower.
A business line of credit is similar to a credit card. Business lines of credit extend a credit limit to the business based on the financial history of the borrower and financial statements of the business. The company can then tap into the credit line for as much or as little as needed. The interest rate on a business line of credit is often higher than a business loan. So having a flexible credit line can expose the business to overborrowing. However, this can be a helpful tool in covering cash flow needs with some degree of flexibility.
Invoice Financing (Factoring)
Factoring is another financing option for cash flow issues when a business has outstanding invoices. A factoring company essentially purchases unpaid customer invoices for a percentage of their total value. Afterwards works directly with the customer to recoup the initial cost of the purchase. The business, in return, receives a lump sum and no longer has to wait for a customer to pay.
This is often a quick way to cover cash flow needs. but there are risks with invoice financing that businesses should understand, too. Invoice factoring may come at a high cost. Especially when compared to more traditional financing methods like bank loans and lines of credit. Additionally, the invoice factoring company may share with customers that their invoice has been purchased. Thus creating an uncomfortable relationship between the selling business and the paying customer.
Be sure to do ample research on the factoring company you choose before selling invoices.
Merchant Cash Advance
Business owners who accept credit cards for purchases may also have an option to cover cash flow problems with merchant cash advances. With this approach, businesses that qualify are given a lump sum that is repaid with a portion of daily credit card transactions.
While the upfront cash is helpful in managing cash flow, a merchant cash advance is the most expensive option for business cash flow financing. Also, most providers of merchant cash advances require a business to be in operation for at least one year. Or have a personal credit score of at least 550, and have a minimum of $50,000 in annual revenue.
Conclusion
As mentioned earlier, running a business can be quite exhilarating. But by now, you can understand that it comes with plenty of headaches. It’s clear that a fair share of these headaches stems directly from challenges with cash flow management.
Luckily, there are actionable solutions to this issue, and you can establish many of them before there are any problems at all. Establishing a system to regulate cash flow, increasing partner/customer accountability, and reducing expenses are just a few ways to improve your cash situation and mitigate the potential to lose out down the road.
Latest posts by Andrew Rombach (see all)
- How to Avoid Cash Flow Problems as a Small Business Owner - March 14, 2018
