According to the Hartford, a U.S. Bank study found that 82 percent of businesses fail due to “cash flow mismanagement.” And that makes sense, given that money is the lifeblood of any business. If the amount of cash coming into your company doesn’t meet your accounts payable requirements, you’re looking at trouble.
Industries that are cyclical (like transportation, retail, or staffing) and contract businesses that rely on customers paying for services (like cleaning, janitorial, or construction) are some of the most common businesses that face cash flow challenges. If you and your company fall into one of these categories, don’t worry. Knowing that cash flow won’t be steady year-round means you’re already ahead of the game. Having a plan to address the dreaded cash flow crunch will prevent you from possibly making a bad decision under pressure.
So what options are there for small- to medium-sized business owners either looking at a cash flow crunch right now or planning ahead to be ready for one? There are a lot (depending on how creative you can get), but we’ll narrow them down to the top three choices and go into the pros and cons of each.
Let’s get started!
Traditional Bank Loan
There’s a reason the word “traditional” is included in the title of this section. Bank loans are the most common option for accessing more money than you currently have. And not just for businesses. Think about buying a car, or a house. You take out a loan for the price of the vehicle (or a mortgage for a house) and pay back the bank over time. Very rarely do people have the ability to throw down $50,000 in cash for a car or $400,000 for a house. (Wouldn’t that be nice?)
The bank lends you the money because it makes money on the interest it charges you. At the end of the loan, you will have paid back not only the initial amount borrowed, but thousands more (depending on your interest rate and term length). That’s only if you—or your business—qualifies for a loan. Factors like credit scores, credit history, and account ages all play into a bank’s decision to loan someone money. The loan application process can be lengthy and because bank loans are usually the first avenue for most people, banks can be selective on who they lend their money to.
If you’re facing a cash flow crunch right now, have good credit, and have made a plan on how to pay back the loan plus interest, a traditional bank loan may be an option for you and your business. But be careful. Loans can be a slippery slope for many small business owners. A loan is more debt that you will have to deal with at one point or another, so make sure to really understand the terms and interest rates before signing on the dotted line.
Also make sure to have a solid plan in place to repay the loan. If you’re facing a cash flow issue now, adding an extra monthly payment is probably not a good idea unless you know for sure that your business will be able to handle the extra expense. Whatever you do, do NOT get another loan to try and cover your initial loan payments!
If the idea of going into more debt with a bank loan makes you uneasy, another option could be to find investors. Investors can be individual people or other companies who infuse cash into a business in return for owning part of your company.
Many businesses have found success when partnering with the right investors, but it can be a bigger change than you think. Depending on the terms of the investment, you could be facing a new reality where you no longer make all the decisions for your company. A value you cared about may be tossed aside in pursuit of different goals. That’s not to say every single investor is an evil villain waiting to take control of your business, but finding the right person (or investment company) can take a very long time. You don’t want to make the decision to partner with someone based off a temporary cash flow problem.
The benefits of using investors are simple: you need money and they give it to you. Because they are getting partial ownership in your company in exchange for the money, there’s usually no repayment requirement or added interest amount. Your business isn’t taking on more debt and you aren’t having to stretch your credit too thin. There are many advantages to partnering with an investor, but again, don’t allow the pressure of a cash flow crunch push you into making a decision you may regret later. Bringing on an investor is a permanent change and not an easy partnership to end if things don’t go the way you had expected.
Slow-paying customers are one of the most common causes of cash flow issues. Depending on your business, you may rely on a small number of high-value customers. However, that means when only ONE of those customers doesn’t pay on time, you are suddenly knee-deep in a cash flow bog. Even worse, if you have a customer who ends up not paying at all, you’re facing the hard choice of pursuing legal action (which costs more money and takes time) or you simply have to eat the loss.
Now, let’s say you have many customers and send a high number of invoices each month. That may sound marginally better than the previous scenario (because if one customer gets behind on payments, it won’t sink your whole company) BUT you have to spend a lot of time managing all those invoices. Who paid? When? How much? Is that the right amount? Who needs a reminder? Who hasn’t paid yet? How much do they owe? On and on and on.
Invoice factoring solves both scenarios and can be a great option for business owners who are facing a cash flow crunch but don’t want to increase their debt with loans or more lines of credit. Invoice factoring uses the assets you already have (unpaid invoices) to inject cash into your business. Instead of having to wait for 30, 60, or even 90 days to be paid by your customer, an invoice factoring company buys your invoices and gets you the money within hours of that invoice being issued. Now, you have the cash to purchase more supplies, make payroll for the month, or gather material for your next project. You don’t have to wait for months before being able to access the money in your unpaid invoices.
Plus, invoice factoring with TBS Capital Funding takes the back-office stress off your shoulders. Instead of you having to worry about who paid and when, we collect payment from your customers and keep track of who has or has not paid. No more spending weekends in the office trying to figure out which customers need to pay by which date in order for you to make payroll.
While there may be many cash flow solutions out there, it’s up to you (as the business owner) to fully understand which ones make sense for your company. We’ve covered the three most common avenues, and while each has its own positives and negatives, invoice factoring is the most simple and quickest way to get that cash flow river flowing again without taking on debt through loans or giving up partial control of your business to an investor.
If you’re currently facing a cash flow crunch, TBS Capital Funding is here to help. And if you aren’t currently in a cash flow crisis but want to be plan ahead, keep invoice factoring in mind. Don’t let the pressure of not making payroll or being unable to purchase supplies steer you down the wrong path. Invoice factoring with TBS Capital Funding uses assets you already have to give you working capital. No debt, no loans, no lengthy application process.