Vector of a small business man owner paying money to big creditors

Tips to Handle Creditors When Your Business is Short on Working Capital

Cash flow issues are not uncommon for small businesses. Indeed, most small business owners will have struggled to pay the bills at one time or another. However, so long as there is a reasonable probability that a business can move out of its immediate problems, a short-term cash flow shortage is not a signal of a failing business.

Of course, it would be wrong to continue taking on new debts if there is no possibility of the company meeting its obligations. If the cash flow gap is merely a timing issue, you should be able to manage your way out of the situation.

But having a plan is not going to prevent the creditors from calling you. And, if you don’t act, creditors will appoint collection agencies or commence legal action against your business. So, here are some tips to help you manage your creditors when your business is short of cash.

Assess the Current Situation

The first crucial thing you must do is not bury your head in the sand. Yes, a cash flow shortage might resolve itself in time. However, your creditors will be barking at your door if you don’t do something.

So, create a day-by-day cash flow forecast that includes all your debtors and creditors analyzed by the date that payments are due. And be thorough, because you can’t afford any surprises when you have no spare cash.

When you have your daily cash flow forecast, you will know when creditors will fall due to when the most severe shortages will occur. Then, you can contact creditors before they chase you, which is always a better way of managing late creditor payments.

Assess the Likelihood of Recovery

It is often not necessary to close a business that is going through a short-term cash flow shortage. However, it would be best if you were realistic about the prospects for a recovery. So, revisit your long-term budget and cash flow forecast and assess the likelihood of the company surviving.

Remember, though, that the current lack of cash may impact things like sales forecasts. For example, you may not be able to afford hiring staff that you had previously anticipated, and you may not be able to purchase all the raw materials of products for resale to support a high level of sales. So, your emergency budget and cash flow will need to reflect the impact of the lack of working capital.

Consider Options for Generating Cash Fast

Depending on the severity of the problem, you might want to consider ways of generating cash fast. Do you have any assets that you could sell, for example? Could you sell products at a discounted price without worsening the company’s financial position?

You could also look at ways to reduce cash outgoings fast. Cancel unnecessary subscriptions and contracts, for example. As a last resort you may want to consider reducing worker hours or laying off staff.

If your business had a good track record before the current financial crisis, you might be able to get a short-term loan to see you through the shortfall. Another option that would liquidate your accounts receivable faster could be to sell outstanding sales invoices to a factoring company. However, to raise any additional financing, it would be necessary to demonstrate that the business is still a viable going concern.

Prioritize Creditors

The next step is to prioritize creditors in order of criticality to the survival of the business. So, the water cooler supplier, for example, will come at the bottom of the list, but vendors required to produce goods for sale would be at the top of the list.

When prioritizing creditors, it would also be advisable to consider the possible ramifications of non-payment. Not paying the IRS, for example, could result in your company being closed and assets seized. On the other hand, it will take some time for a small, local supplier to escalate the debt collection to the point that legal action will be imminent.

Of course, it would be best to avoid any action being taken against the company at all. Such action would affect the credit score of the business. So, the objective is to keep creditors at bay for long enough for you to resolve the cash flow problem.

Create a Payment Plan

Based on your cash flow forecast and creditor prioritization, you can now create a payment plan. The aim is to pay or negotiate with the critical creditors first and then see what cash you have left for non-essential suppliers.

You might find paying that one or a few sizeable creditors will eat up all your short-term cash. If that is the case, it might be best to attempt negotiating repayment plans with these vendors. If you can demonstrate that the cash flow crisis will be short-lived, suppliers may give you more time to pay. Some creditors may also accept part payment of debts if you can provide a firm date for the balance payment.

Communicate with Creditors

If you communicate and are honest with creditors, they will be more likely to be lenient. So, don’t ignore the phone calls, reminders, and collection letters. Instead, give firm payment dates when you can or suggest a realistic timescale for settlement.

When dealing with significant critical suppliers, it is generally best not to use the usual excuses for non-payment of invoices. Vendors will have heard things like ‘the check is in the mail’ so many times before that they will see right through it. Plus, lying or making promises you can’t keep puts you on the back foot when the check fails to arrive, and you need to ask for another week’s grace.

Monitor Cash Flow Daily

It will help you navigate your way out of the cash flow shortage if you update your cash forecasts daily. Then, you can pay overdue creditors as soon as cash becomes available. An up-to-date projection will allow you to better deal with creditor phone calls and possibly settle some creditors earlier than expected.

Of course, you will also need to do what you can to speed up cash receipts from customers. So, a daily check of accounts receivable, followed by collection calls if required, will help increase cash inflow.

Keep the Bank in the Loop

It would be best to keep your bank informed about what is happening, especially if you have bank loans or an overdraft. If you don’t, and the bank learns the business is experiencing difficulties, financial support might be withdrawn or limited.

So, provide the bank with regular management accounts and cash flow forecasts. And, if raising additional funds from your bank is an option, apply for that financing sooner rather than later. Banks will generally be more amenable to lending to a company that proactively manages a problem than to one seeking a last-minute bailout.

Talk to Your Accountant

Your accountant may also be able to help you manage your creditors during a cash flow crisis. An accountant can negotiate payment plans for you and provide third-party, qualified validation of your recovery plans. You will also need an accountant to provide insolvency advice should that become necessary.

The Bottom Line

The best way to manage creditors during a cash flow crisis is to talk to them. But first, assess the situation, draw up a recovery plan, and prioritize payments and negotiations with vendors and lenders. And make sure you keep the bank and your accountant in the loop, too. But most crucially, don’t bury your head in the sand because cash flow problems rarely go away of their own accord. And if you don’t communicate with creditors, they will be more likely to escalate debt collection to the next level.

Your Questions Answered Quickly

Whether your business is thriving and you can’t keep up, or you are waiting on clients to pay, Universal Funding can help your growing company. Call us at 800.405.6035 or complete our rate form today to learn more about invoice factoring and how it can improve your company’s cash flow.

About Universal Funding

Universal Funding is a nationwide invoice factoring solutions leader, supporting growth-focused businesses with scalable factoring solutions. With its invoice factoring, payroll funding, and purchase order financing services, Universal Funding provides clients with the working capital needed to grow and support their businesses without taking on new debt. Ranked as one of the nation’s top invoice factoring companies, Universal Funding provides cash flow financing for businesses all across the United States.

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