Running short on cash is a problem that plagues businesses of all sizes, but especially startups and small businesses. When you don’t have the cash you need to keep moving the ball forward, it puts your business behind the 8-ball, and it’s a problem that can prove insurmountable if it snowballs out of hand.
When a business is having cash flow issues, the first assumption is that the company must be failing. But, this couldn’t be further from the truth in many cases. Many businesses with cash flow problems have them because the business is doing too well, and growing too quickly.
Thankfully, there are a few things you can do to help remedy these issues if your business is running short on cash. Let’s take a look at some of the best ways to tackle your cash flow issues.
Codify Your Payment Terms
For many businesses with cash flow issues, these problems stem from lax payment policies. Every business wants to offer its clients with payment flexibility, but for many businesses, their relaxed payment policies can spell doom for them from a cash flow standpoint.
Other businesses are going to take advantage of your relaxed policies because it provides them with increased liquidity and keeps them from running into their own cash flow problems. Put yourself in their shoes, would you pay all your invoices early or on-time if you didn’t have to?
To avoid this pitfall, make sure that you codify your payment terms, so your customers know exactly what’s expected of them upfront. Create a payment policy, and make sure it addresses these key areas:
- Payment Terms: Put deadlines in writing, so your customers are aware of them, and make sure you’re holding your customers accountable to these deadlines.
- Payment Penalties: When you pay your bills late, you’re subject to penalties. Your business should be no different. Create a clause that specifies the penalties for late payment.
- Payment Discounts: One of the best ways to encourage clients to pay their bills expeditiously is to offer a discount for early and even on-time payments. Doing so will incentivize your customers, which can help prevent many of the most common cash flow issues.
Build a Cash Reserve
This is a long-term strategy, and it can be difficult to implement at first since most businesses aren’t in a position to squirrel away big chunks of cash for a rainy day. But, over time, this is a strategy that can pay serious dividends for your company.
First, come up with a small percentage of your gross receivables that you can allocate to your cash reserve. Have that percentage transferred to a secondary account, and do your best to forget that it even exists. Over time, you’ll have a solid cash reserve you can tap into for emergencies, and to remedy any issues you’re experiencing with cash flow.
Read more about ways to keep track of your business finances.
Lease Equipment Instead of Buying It
The equipment needed to operate the business can be extremely expensive. While buying equipment is the most cost-effective way of acquiring the supplies you need to do business, it can wreak havoc on your cash flow.
Meanwhile, by leasing equipment, your equipment costs will be more manageable in the short term, you won’t have to worry about costly troubleshooting or repairs, and you’ll always have the newest and most cutting edge equipment available.
Consider Invoice Factoring
These days, more businesses of all sizes are turning to invoice factoring as their preferred way to solve liquidity issues.
Invoice factoring is a type of financing where your business sells your AR to a company specializing in invoice factoring. In exchange, the factoring company pays cash up front, and then they’re in charge of collecting on the invoice when the client pays.
This type of financing is especially attractive because it isn’t a loan, it’s a sale. So, there won’t be any banks digging around into your financials, and there’s no approval process or waiting period associated with invoice factoring or accounts receivable financing as it’s sometimes called.
In most cases, the factoring company advances around 80% of the invoice, and the remaining 20% sit in reserve until the invoice is paid. Once the invoice is complete, the factoring company will release the remaining balance of the invoice to you, less their fee.
Invoice factoring gets you the cash you need immediately, without any impact on your credit score. But, the factoring company charges a fee, and that impacts your profit margins. For this reason, most businesses use invoice factoring only when they need to increase liquidity. At other times, they handle AR in-house, which eliminates additional fees.
Apply for a Government Business Loan
Believe it or not, the government offers loans to small businesses, and they may be able to provide you with the cash on hand you need to run your business.
The SBA or Small Business Administration offers small loans of $50,000 or less to small businesses that need cash to finance their operations. In most cases, these loans are easier to get than traditional financing, and the SBA takes into account that you may have a limited track record and only a few assets.
With these loans, the administration may provide additional business training, which can be invaluable to you as you build your business.
For too many thriving businesses, cash flow problems keep them grounded and inhibit their growth. Fortunately, there are a few different tools savvy business owners can make use of in order to maximize their liquidity, so they have the cash on hand they need.
Each of the suggestions on our list can help with liquidity, but a few, in particular, can have a major impact on your cash supply. First, by codifying your payment terms upfront and on your invoices, you’ll establish clear guidelines for what you expect of your customers. You may be surprised by how quickly they start paying their invoices on time.
For immediate results, invoice factoring can be the ideal way to increase your liquidity. For a small fee, an invoice factoring company may be able to provide you with immediate cash upfront, so you can keep your business moving forward.