Cash flow is the lifeblood of small businesses, but sometimes due to slow receivables or unforeseen circumstances, small business owners find themselves in a cash crunch. Being short of cash can be frustrating, stressful and disappointing, but with a bit of adaptability and careful planning, you can use this cash crunch as a learning experience to strengthen your small business's finances for the future.
Here are a few key tips and insights on how to escape from a cash crunch:
Identify the Cause
What is the driving force behind your cash flow shortfall? Is it customers who are slow to pay their bills? Have you had unexpected expenses? Are your sales down lately compared to previous intervals? Were your cash flow projections overly optimistic?
Cash crunches don't really materialize out of nowhere, and there's usually an operations-related reason for your business's cash flow problems. But before you can rectify the situation and prepare for the future, you need to identify the exact cause of your cash crunch.
Accelerate Your Collections Activities
One of the most common causes of a cash flow crunch is slow receivables. If your customers are slow to pay their bills, it can result in cash flow problems for your business. One of the best ways to resolve a cash flow crunch is to get on the phone and start checking in with your customers and ask them to simply pay their bills. If you have a standard process in place where customers are expected to pay invoices within 30 days, and then overdue payments get flagged for follow up after 60 or 90 days, consider moving up that follow-up step and call everyone sooner than they'd normally hear from you. Many times, customers are happy to pay their bills and they just need a friendly reminder.
Ask for New Payment Terms
Cash flow is often a matter of managing accounts payable and accounts receivable to make sure plenty of money is coming in without sending too much money out. One way to ease a cash crunch is to ask your creditors for a better deal on paying your bills, while also asking your customers to pay their bills more promptly. Consider changing your payment terms. For example, instead of asking for Net 30 payment terms on your invoices to your customers, ask them to “pay within seven days," or say that “payment due upon receipt." Just a simple change of wording might open up some faster payments. Also, ask your vendors if they would accept Net 30 payments. Clarify expectations to make sure you're not paying your own bills unnecessarily quickly.
Get Access to Capital
Cash crunches can be especially nerve-racking for small business owners that do not have adequate access to capital. Sometimes you might need to borrow money on a short-term basis in order to make payroll and pay rent, and keep your business running until your next big paycheck arrives.
Here are a few small business financing options to consider:
- Term Loans
Fully amortizing up to 5 year terms. Ideal for business owners with large single purchases or need to refinance debt. Fund marketing efforts, open new locations, or purchase equipment; all while building your business credit. What’s more, term loans can be funded in as little as 3 days and require less stringent underwriting guidelines than the SBA.
- SBA Loans ($50,000 - $350,000)
Small Business Administration Loans are generally the least expensive financing option for small business owners. The SBA 7(a) loan is the Small Business Administration’s most popular product and offers a flexible sum of cash that can be used for anything from managing daily operations to purchasing new products and refinancing high-interest loans.
Least Expensive Financing - It would be tough to beat the low rates of SBA loans. SBA is an excellent option for business owners looking to keep financing costs down.
Great Financing for Growth - If your primary goal is to grow your business, getting an SBA loan is an excellent way to reach that objective. You get the funds you need on manageable terms.
Funds in as fast as 7 days after the application is completed!
- Asset Based Lines of Credit
Rusiness owners may use asset based lines of credit for an array of business uses. Asset based financing for small businesses can be either revolving or term loans secured by assets such as accounts receivable, or real estate.
- Revenue Based Loans
A revenue based loan could be your business's lifeblood and provide it with several financial benefits. When your business is growing, chances are you'll need an injection of cash to continue its growth. Bank loans are often times too restrictive, time intensive and highly challenging to obtain these days. In this situation, a revenue based loan may be the best solution. If you use it wisely, a revenue based loan could do wonders for your business.
- Merchant Cash Advance
A Merchant Cash Advance (MCA) can provide business owners with an upfront fixed amount of cash in as little as 24 hours. The funding amount is based upon a percentage of the businesses credit card receivables or daily cash balances using historical credit card receipts and/or bank statements to determine the initial advance. The business pays back the advance, plus a percentage, often referred to as a discount factor, from a portion of their credit card receivables or cash available plus a percentage which is often referred to as a discount factor. The remittances are drawn from the business customer on a daily or weekly basis until the obligation has been met. An MCA is not technically a business loan, and as such MCA's are not limited in what rates they charge or what terms they establish and therefore often have high interest rates. For this reason it is very important for a business owner to be completely aware of how the MCA product works and how it could affect their business. MCA's are good options for small business owners who may not have strong credit but have lots of credit card activity or steady cash flow and need financing quickly.
- Cash Flow Loans
Even if your business is growing, you may find yourself needing extra cash to cover day-to-day expenses such as payroll, rent and inventory, or to pay for short-term projects that could grow your revenue in the long run. Uneven cash flow is one of the biggest challenges of business owners. For this type of business financing, lenders provide you funds and use your future expected cash flow as collateral for the loan. You’re essentially borrowing from cash that you expect to receive in the future by giving the lender the rights to a predetermined amount of these receivables. These are primarily used for working capital or take advantage of short-term ROI opportunities. Your credit scores will usually be checked, but they play less of a role. As the name indicates, the lender is more concerned with inspecting your cash flow (usually bank statements) to approve your application. Turnaround time is another great feature of a cash flow loan, as funding usually takes place in a matter of days.
At LVRG, we offer extensive solutions and targeted solutions to help small to mid size business owners optimize their cash flow and effectively manage their revenue cycle. Have questions about small business cash flow? Chances are, we've got answers. Here to help!