Small Business Cash Flow Woes? Know Your Options

Business.com / Finances / Last Modified: February 22, 2017

Hit a cash flow crunch? Find out if a small business P2P loan is right for your business.

As a small business owner myself, I know first-hand the challenges of managing cash flow. No matter how profitable your business is, how much your customers and clients love you, or how many projects you’ve got in progress, an unexpected cash flow crunch can sink a small business.

Cash flow problems are a leading cause of startup failure: if you don’t have enough cash on hand to pay vendor invoices and keep the lights on, it doesn’t matter if you’ve got millions coming in the door six months from now. You need money now.

For many companies, smart planning can help minimize cash flow woes. Keeping a cushion of cash on hand for can help smooth out a slow sales month.

Using a cash flow statement will help you track the inflow of revenue and expenses during a set period so you can plan ahead for the next six to 12 months.

Getting proactive about unpaid client invoices is also critical; if your business doesn’t have a solid late-payment penalty policy in place, put one in place now.

Collecting a deposit upfront can help mitigate these cash flow woes.

Related Article: Top Tips to Ensure Clients Pay on Time and Increase Your Cash Flow

Even with the best planning, businesses can still be hit by a cash flow crunch. Whether you need to upgrade equipment or expand to a new location, a lack of cash can put the brakes on business scalability.

If the cash flow problem is small, forgoing your personal salary for a few months may be enough to bridge the gap. But when the cash gap is pretty sizeable, holding off on collecting a salary for the next month won’t be sufficient.

So what can your small business do? Here are three options:

Cash Flow Problem #1: Unpaid Invoices

Too much lag time between invoicing collections and payroll means not enough cash on hand to pay your team and vendors.

As a general best practice, if your business will have to pay out a lot to third party contractors or vendors before collecting client payment, require a deposit up front to help offset the potential cash flow crunch.

Be clear about late payment terms up front with clients. While standard late payment practice varies between industries, a good rule of thumb is to add a five percent late payment penalty after five days, and institute work stoppage after 30 days; conversely, you may wish to incentivize customers by offering a discount for early payment.

When all else fails, consider turning over invoice financing to a company like Fundbox, which advances payment for outstanding invoices with a nominal clearing fee. 

BlueVine is another invoice factoring service that provides microloans from $5,000 to $250,000. APR can be high, so read the fine print closely.

Related Article: Real Talk: Is Franchising As Profitable As You Think?

Cash Flow Problem #2: Expensive Upgrade or Expansion Costs

When equipment breaks and the upgrade is just out of reach, turning to a bank for financing is not always an option, especially if you have poor business credit.

Even if your credit is stellar, securing financing through a traditional lending institution can be a lengthy process that only exacerbates the cash flow gap, rather than helping close it.

P2P business loans can help. Unsecured business loans from companies like Lending Club are issued based on a merchant’s business health and selling history, rather than a credit score alone.

Don’t jump at the first offer you get. Since terms can differ between P2P lending companies, compare unsecured business loan options to find the best offer for your business.

Cash Flow Problem 3: Not Enough Cash on Hand to Cover a New Franchise

Expanding to a new location or adding a franchise can be a huge financial undertaking.

Even if you secure a loan to cover the bulk of these costs, you may still find that cost overruns or construction delays eat into your day-to-day cash flow.

Being a franchisee can be extremely profitable, some Checkers & Rally’s burger franchisees earn as much as $297,000+ per year, but when you’re just getting started, you’ll need enough on hand to cover franchise fees, royalties, and advertising fees.

That’s why most companies require franchise owners to have a minimum of $250,000 in liquid assets. If you don’t have that on hand, a business loan can help. 

Getting a business loan of any kind requires some pre-planning, so take the time to review your credit history, correct any reporting errors, and gather all necessary documents for loan approval, including tax returns, business leases and your business plan.

Related Article: Pocket Payments: How To Find The Right Mobile Payment System For Your Business

Bottom Line

For many small businesses, a P2P loan is a perfect solution to temporary cash flow woes.

But before you jump into borrowing, take the time to evaluate your options.

This includes an honest assessment of your loan payback timeline. You don't want to dig yourself into a bigger cash flow hole.

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