This article is part of a larger series on Business Financing.
Cash flow problems can occur when businesses struggle to cover debt payments, payroll expenses, or inventory restocking. The first three of our cash flow solutions recommend types of financing that can be used to help with short-term cash flow crunches while the remaining five offer operational solutions that may prevent future cash flow issues.
Financing Solutions to Improve Business Cash Flow
1. Obtain Short-term Loans for Working Capital
Short-term loans for working capital are easy to get approved for, and lenders can provide funding as soon as one business day. These loans have a higher annual percentage rate (APR) than many other lending options. However, the total cost of capital can be less expensive than longer-term options with a lower APR, given the shorter length of time that a business is borrowing money.
2. Use Small Business Lines of Credit
A small business line of credit works like a credit card; borrowers only pay interest on the outstanding balance and not on the entire credit line. When business owners pay down their owed balance, the amount of credit replenishes and is available to borrow again. Interest rates are often more favorable, especially for businesses with good credit.
3. Credit Cards for Smaller Purchases
Business credit cards are another good option to improve cash flow. Credit cards provide smaller limits than short-term loans and lines of credit. However, they’re easy to obtain, and many offer rewards options on purchases. Credit cards can be used for smaller purchases and operational needs that do not require larger lines of credit.
Operational Solutions to Improve Business Cash Flow
4. Renegotiate Terms & Contracts
Businesses struggling with cash flow problems need a permanent solution to increase their disposable cash. This is also true if adding revenue doesn’t seem to increase the bottom line. One possible cause of cash flow problems could be how much and how quickly a business is paying suppliers and other contracted vendors.
One option that business owners have to improve cash flow involves negotiating better contract and invoice payment terms with trade partners. Extending the time a business has to pay a partner―from due on receipt to due in 30 to 90 days―allows the business to hold on to more cash for a longer time.
With contracts, negotiating to obtain better terms for cash flow will help. For instance, a retail business with strong seasonal variation in sales that leases its store location should look to negotiate larger lease payments during its busy season and smaller lease payments in their slower season. Changing payment agreements can apply to subscription-based services as well. An annual or quarterly subscription might be cheaper as some service providers will give discounts for paying in this fashion.
5. Encourage Faster Repayment of Invoices
Every small business owner with cash flow problems should determine what they can do to make it easier for their clients to pay faster. Faster repayment can improve immediate cash flow crunches. There are many ways to do this, and businesses can get creative based on their circumstances.
- Set up auto-billing: Signing clients up for an automatic billing cycle where the amount due is pulled from their bank account or charged to a credit card on the same day each month will provide for predictable payments.
- Accept online payments: Paying a bill online with a credit card is convenient for clients. If clients can pay online, then they may be more willing to pay the invoice upon receiving it. Keep in mind that accepting credit card payments can come with credit card processing fees. You may need to tweak pricing to compensate for the fees.
- Encourage early payment and discourage late payment: Most people are cost-conscious. Clients could be happy to pay more if it means they will get a better deal or discount. Discounts need not be significant but should provide for a sufficient enough incentive to pay early.
- Let clients choose their payment day: Every business has different revenue cycles. It may be beneficial to some clients to make payments mid-month, while others would prefer to make payments at the beginning of the month. Allowing clients to choose the day that works best for them will incentivize them to pay on time.
6. Improve Invoicing Processes
Business owners that don’t use an accounting system to invoice clients should invest in an accounting solution. They should also automate their invoicing system because both processes can help address cash flow problems by reducing the number of errors, ensuring everyone receives bills on time, and providing business owners with a clear snapshot of their cash position.
Benefits of automating an invoicing process include:
- Reduced costly invoicing errors and delays
- Faster invoice delivery to clients
- Increased data clarity and insights
- Reduced effort for past due invoice collections
7. Manage Office Expenses
Reducing expenses is a common approach to trying to fix a cash flow problem. However, a business can go about this the wrong way by cutting larger expenses that funnel into generating revenue. There are other expense-reducing measures that business owners can execute. This will help maximize the amount of cash flow the company receives without hurting overall business operations. It also will improve your debt service coverage ratio, which lenders will look at should you apply for financing.
Business owners can reduce or eliminate nonessential expenses, like landscaping or pest control, to increase cash flow. Often the vendors that business owners cut will offer discounts to earn back business, which can be great after the business owners resolve cash flow problems. Additionally, a company’s supply budget can be managed more efficiently to ensure wasteful expenses are minimized.
There are even ways to reduce the costs of services business owners continue to use. Services like phones, internet, and third-party information technology (IT) support can provide cost-saving opportunities. Business owners without a contract can shop around to see if there are cheaper options available for the same service with other providers.
8. Monitor and Control Growth
Business owners get excited about growth, with good reason. Growth means more employees, higher revenue, new opportunities, and personal success. However, unmonitored and unmoderated growth can cause cash flow issues. Business owners should develop the discipline to turn away customers if they’re experiencing cash flow shortages.
Unchecked growth increases your future receivables and current expenses. As expenses outstrip revenue, businesses face cash flow problems. In the short run, business owners may use financing as a cash flow solution. However, repeated occurrences will only compound financial problems and can ultimately cause the demise of a business.
There are many ways to solve business cash flow problems. Some solutions involve being smarter about invoicing and getting customers to pay quicker, while others involve cutting expenses. Each solution can help with overall cash management and improve the ability of a business to assess how much cash they have on hand and how much cash they will need in the short term.