The leading cause of failure for any small business is cash flow issues. If you lack money on hand to keep your operations going and pay your vendors, it doesn’t really matter if you have a ton of money coming in several months from now because you need that money now.
For plenty of small businesses, planning ahead could help reduce problems with cash flow. But what if your planning doesn’t pan out because of these common cash flow issues. What should you do?
Unpaid Invoices
Having too much time between payroll and invoicing collections basically means that you won’t have sufficient money to pay your vendors and employees. As a rule, if you anticipate that you’ll have to pay plenty of vendors or employees before successfully collecting payments, you should require clients to make an upfront deposit to try to offset a potential crunch in your cash flow.
Make it known to clients that late payments will come with penalty fees and that early payments will come with discounts. If this still doesn’t work, you can consider invoice financing. This involves an invoice factoring company paying your outstanding invoices for a fee.
Insufficient Funds for Expansion
If you’re expanding your operations to another location or investing in one of those profitable fast casual pizza franchises, it could be a costly enterprise. Even if you manage to have the money to cover most of the costs, you might find that construction delays or cost overruns could easily eat into your cash flow.
While expanding your business or buying a franchise could be very profitable, when starting out, you must have sufficient funds on hand for covering upfront costs. This is the main reason it’s recommended that businesses have liquid assets of at least $200,000 when buying a franchise or expanding.
Fortunately, you could consider getting a business loan if you need more funds. Securing a loan will require planning. You need to take ample time going over your credit history and fix any errors you find, gather and complete all paperwork required for loan approval, such as businesses leases, financial statements, tax returns, and create a solid business plan.
Costly Upgrade Costs
When you need to fix or upgrade new equipment, but don’t have enough cash to cover the expenses, asking funding from banks or traditional lenders might do the trick, but only if you have stellar business credit. In this case, you might consider peer-to-peer lenders.
Unsecured business loans from P2P lenders are generally based on the selling history and business health of the borrower instead of just credit history. Do note though that as with all kinds of loans, terms vary widely among P2P lenders, so you need to do your research to obtain the most suitable option for you.
Regardless of how much money your business makes, an unexpected crimp in your cash flow could easily wreak havoc on your entire operation. Before resorting to borrowing, however, do the math first, particularly the potential payback timeline. Otherwise, you risk owing money you can’t pay on time, which will again hurt your cash flow.