Running a business is an exciting endeavor that offers the most flexibility in earning an income. However, many small business owners, whether just getting started or pros in their field, find managing cash flow a challenge. According to a 2017 study conducted by WePay, nearly 41% of small businesses face cash flow issues at some point during the year, and 59% state the financial impact is significant. While maintaining positive and steady cash flow is often easier said than done, there are several strategies small business owners can utilize to ease cash flow burdens. First, however, it is beneficial to know why cash flow issues arise.
Why Would a Business Have Cash Flow Problems?
Several driving forces can lead to cash flow problems in any business, no matter how strong of a product or service they offer. For some small businesses, cash flow woes are natural throughout the year, given seasonal ups and downs. However, there are some scenarios where cash flow is lacking because of inconsistent sales. This is often caused by a failure to implement a proper sales system and pipeline, or an unmotivated sales force.
In other cases, small businesses may not implement the best financial management, leading to little reserve funds or too many liabilities. Companies may also experience cash flow obstacles when trends in their market shift toward other products or services. No matter the reason behind cash flow concerns, small businesses have several remedies, each with benefits and caveats to consider.
How to Avoid Cash Flow Problems
Small businesses can combat lacking cash flow by first knowing their options for capital infusion. Below are several solutions to consider.
Take Out a Working Capital Loan
A working capital loan is intended to help a small business get enough capital in the bank to cover ongoing expenses of the company. There are both advantages and disadvantages to choosing this option. Working capital loans may be used for overhead costs, inventory purchases, or payroll, and in some cases, businesses can receive funds within a day or two.
Although the funds can be received relatively quickly, working capital loans come with some downsides. A working capital loan requires a company to have at least one year in operation, as well as verifiable revenue. Some lenders may also require collateral to back to the loan; without it, a higher interest rate may be charged. Working capital loans can be helpful in a pinch, but they are intended to be short-term loans which is reflected in the cost.
Fall Back on Invoice Factoring
Invoice factoring is another solution for cash flow challenges. Small businesses with outstanding invoices may sell them to a factoring company for a percentage of the total outstanding amount. The factoring company pays the small business a lump sum and recoups the balance by collecting on the invoices over time. Factoring is also a quick fix for cash flow shortages for businesses with a large invoice pool.
However, the cost may be high in some scenarios. If a business does not pick out the right invoice factoring company, they may be on the hook for significant fees for doing business. It’s important for businesses to understand typical costs beforehand in order to find the right company to do business with.
Take Out a Short-Term or P2P Business Loan
A peer-to-peer, or P2P business loan can also be a viable solution for a cash flow issue within a small business. With this type of shorter-term lending, companies are able to find financing funded by individual or institutional investors through an online platform. The benefit of using this type of financing is that there may be more options for small businesses with a less than perfect financial track record. However, P2P and short-term business loans may come with a high interest rate and funding fees that can be a challenge to repay over time.
Rely on a Merchant Cash Advance
Small businesses may also turn to a merchant cash advance for help in a cash flow bind. With a merchant cash advance, companies that have debit and credit card sales consistently can get a lump sum of financing from a merchant cash vendor in a matter of days. The financing is then repaid on a daily or weekly basis from new credit card and debit card sales of the business. While this often the fastest form of borrowing for small businesses, it comes at a high cost. If credit and debit card sales are high, the loan is repaid quickly. However, slower sales may mean a drawn out repayment that ultimately costs the business more.
Related: How to Get Out of a Merchant Cash Advance: 4 Top Options for 2023
The Bottom Line
Cash flow is a common issue among new and old businesses, large or small. When it looks like there might be a cash flow problem in the near future, know what options you have available. Each of the strategies listed above can help solve the cash flow concern, but it is essential to understand the advantages and disadvantages of each. Be sure to review the financing options available to your business based on the ability to repay, the total cost, and the ability to qualify for applying for a cash flow fix.
Article written by Andrew from LendEDU – a small business working to help educate consumers in everything finance.
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