Cash flow forecasting remains one of the trickiest predictions to get right. Many small-business owners may fail to plan adequately for an unexpected cash crunch. This can turn a minor inconvenience into a crisis that can sometimes ultimately even lead to the closure of the business.
Cash crunches can happen for any number of reasons: a client doesn’t pay on time, an adverse event leads to surprise expenses or honest mistakes in the timing of cash coming in and out are all common situations that can lead to a cash flow problem. Instead of scrambling at the last minute to find cash from somewhere, you should have a “cash shortfall emergency plan.” And when the problem happens, you should know exactly how to solve it with minimal disruptions to your daily business operations.
Maintain an Active Revolving Line of Credit
These loans may not have a fixed payment schedule or require you to take the borrowed money at any given time. A credit card is a good example of a revolving line of credit; you use how much you need when you need it and pay it back when you can. For many companies, a small-business credit card can be an easy and fast way to secure a line of credit up to $100,000.
Larger companies may tap into “revolvers” or revolving credit facilities, which can run into the millions of dollars. These revolvers are likely to require that the company’s financials meet certain performance standards called covenants, which are usually expressed in financial ratios. They may also have additional fees beyond just interest and points, such as a fee for the amount of unused credit. Maintaining an open line of credit can allow your business to instantly tap funds when a cash crunch occurs, without the need to go through an application process or wait for approvals.
Reach Out to Your Vendors
Small businesses that have long-standing relationships with vendors and have a consistent on-time payment history may be able to secure vendor financing. For companies facing a short-term or one-time cash crunch, vendor financing could be a simple and cheap way to cover the shortfall. Your business vendors may allow you to wait 30, 60 or 90 days to pay them what you owe for inventory or other merchandise delivered. This can amount to an interest fee loan for the full amount you owe.
That means the cash you would have used to pay your vendors could instead be used to cover other expenses—like payroll—where you don’t have as much flexibility. Another possible approach is to use vendor financing to purchase inventory, then sell the inventory to generate cash. Many small-business owners don't realize vendors are under pressure to maintain existing customers and will likely do what they can to help you with a short-term problem.
Reach Out to Your Customers
If traditional financing options aren’t available to you, it may be wise to reach out to your customers. Consider offering them discounts on existing or future contracts in exchange for accelerated payment schedules. A client with whom you have a positive relationship may be willing to pre-pay for work in exchange for a discount. Many companies may already offer invoice terms whereby a customer will be given a small discount if they pay invoices early. This is the same concept, just taking it to a higher level by offering a larger discount for payment in advance.
Sell Your Invoices
If your company sells to reputable companies that take 60 or 90 days to pay, you may be able to obtain a loan secured by the invoice. Known as factoring or accounts receivables financing, your business can likely obtain anywhere from 75 to 95 percent of the value of the invoice in advance. You can assign the right to collect on the invoice to the factoring company, and once they collect they pay, you’re the invoice amount minus what they advanced you and their fee. There are many variations on this arrangement and fees can vary tremendously, so you should do your research in advance and not wait until you need the money to find a factoring company.
Use Your Personal Assets
Small-business owners may already have so much of their time and net worth tied up in their business that it’s safest not to keep other personal assets away from the business. But if a cash crunch occurs and you run the risk of losing your business (and hence your income and most valuable asset), you may have to serve as the lender of last resort. As the owner, you can loan your business the money at market rates and develop a payment schedule that's realistic for your business and for your personal needs. It may not be ideal, but it can be better than the alternative.