Even more than being profitable, cash flow is the true barometer of the health and strength of your small business. Getting your business into cash flow-positive territory, however, is much easier said than done.
For a new business owner, managing cash in and cash out can be a daily struggle. It’s often a cyclical challenge where the money coming in needs to go immediately back out leading to cash deficits along the way. This can cause strain when it’s time to pay vendors, get products to market on time and in just about all other areas of your business.
It’s easy to see how cash is your business’ lifeblood. Regular cash flow management is your best bet for staying ahead of your financials.
Even with the best planning, however, small businesses can still feel a serious cash crunch now and then. When you need cash fast, there are several routes to consider.
5 Ways to Obtain Cash Quickly
1. Get Paid Upfront
Cash flow, much like the term implies, is an ebb and flow of cash coming in and cash going out. When more is going out than coming in, you need a way to break the cycle and give your receivables a chance to catch up.
There are ways to encourage clients and customers to pay upfront for products or services not yet rendered. The simplest and more common method is with a gift card program. Gift cards are an inexpensive way for customers to pay you before any action is necessary on your part. That equates to cash coming in faster and gives you the chance to get cash flow back into positive territory.
2. Collect Payments Due
Getting paid up front is key. Just as crucial is collecting payments from customers when they’re due. Not surprisingly, customers aren’t going to bang down your door with a check in their hands. Clients may need a friendly reminder that payment is due.
There are a lot of ways to better ensure customers and clients pay on time. You can shorten your payment terms across the board or do so just for those clients who are chronically slow to pay. Shortening 30-day terms to 15 days, or 60-day terms to 45 days is an acceptable practice that can make a serious dent in a company’s cash flow deficit. However you choose to collect payments from customers, clearly communicating the changes along the way will ensure you maintain strong client relationships while better protecting your cash flow.
3. Slow Your Payments
As you’re evaluating terms for customer payments, take a look at the terms your vendors have in place and find opportunities to slow your payments. Slowing the pace at which cash flows from your business can also help reduce potential cash deficits.
If a vendor grants you 30-day payment terms, take advantage of those terms and save check writing until the end of that period. You can successfully manage your accounts payable to pay vendors on time and still keep as much of your cash for as long as possible. As long as you’re not late in paying a vendor and remain in good standing with strong credit, slowing payments is an effective way to stay in the black.
Factoring is a less common form of cash flow management for businesses in need of quick cash, but it can be highly effective for those companies who face slow-paying customers or are unable to shorten a customer’s payment terms. A business can sell its invoices or other accounts receivables to factoring firms. The factor writes the business a check minus a factor fee giving the business immediate cash in the bank.
Startups can also use factoring as a strategic way to secure cash flow. Most startups don’t yet have the credit history needed for certain types of small business loans. Since factors look at the ability of the customer to pay when assessing risk - not at the credit history of the business - factoring can be an easy source of quick cash for a young company.
5. Borrowing from Alternate Sources
When all else fails, borrow cautiously. Many entrepreneurs will borrow from their personal funds before they’ll let their business go under. Many experts agree that this is the right move if it means keeping yourself afloat. But, like with everything, there’s a right way and a wrong way to borrow. And, as you would with any bank, have a plan to pay yourself back.
If you decide to borrow, start by liquidating inventory, equipment, and depositing cash owner equity. If you have a line of credit, meet with your bank and discuss options such as keeping your line open and whether increasing your credit line is an option they’re willing to explore.
Take Action & Create a Plan
Getting your hands on cash quickly isn’t always easy. The sooner you take action to break the negative cash flow cycle the better. The good news, though, is that there are multiple ways to secure the cash you need to boost your cash flow into positive territory.
One of the best ways to protect your business from the damages caused by a cash-flow deficit is with the support of a SCORE mentor. Your mentor will help you evaluate your financials and create a plan to stay cash-flow positive. Contact a SCORE mentor today.
Copyright © 2023 SCORE Association, SCORE.org
Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.