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One problem that plagues companies of all sizes, no matter how long they've been in business, is short-term cash crunches. The Small Business Administration lists low cash reserves as one of the most common causes of small business failures. For company owners, managing cash flow to ensure having enough working capital on hand is one of the most important tasks they tackle every day.
Experiencing a short-term cash flow issue can cause long-term headaches for businesses. Being unable to pay bills or vendors on time can mean late payment penalties, the loss of the ability to make purchases on credit with certain vendors, or even the end of business relationships with customers and suppliers. These losses could eventually lead to the failure of a business.
Vigilant owners pay attention to everything going on around their business. Are there issues that could disrupt their supply chain — a strike at a parts factory or a coming storm that could knock power out for an indeterminate period? Are customers facing their own financial challenges that could affect their ability to pay on time? As an owner, pay attention to these issues, then have these potential solutions at hand to solve any short-term cash flow issues you may experience:
1. Maintain, then expand, company sales
You want to keep your current clients happy, then go and find new clients who'll increase your cash flow. Look into accepting payments through ACH payments, PayPal and credit cards to ensure quicker receipt of your money. You may want to create a loyalty program for repeat customers or use a service such as Five Stars. To attract new customers, you may need to provide discounts or coupons through Groupon or similar companies, or you can advertise through social media or target customers through specialty publications.
2. Provide incentives for paying early
You may want to give customers a percentage off if they pay early or with cash so you avoid transaction fees — and don't forget to take advantage of these discounts when you have the available capital to do so.
3. Take out a business loan
The Small Business Association offers a variety of grants and loans for different purposes, including general purpose loans, disaster loans and business expansion. You also can look into taking out a business loan from a bank. You also can tap into personal loans from family or friends — which are usually easier to obtain and need less time and paperwork to finalize — to tide you over until your cash flow situation improves.
4. Set up a business line of credit
If you want more flexibility in managing your business, a line of credit may be the way to go. A loan typically is for a specific purpose (for example, buying new equipment), while a line of credit can be tapped whenever your business needs quick cash and may be a better solution for short-term cash flow issues.
5. Work with private capital funding sources
There are many alternative lending options on the market. For example, Lighter Capital offers revenue-based financing to help out technology startups. In exchange for up-front capital, you share a percentage of your future revenue with the investor, but loan payments are tied to monthly revenue. Another possibility is Lendio, which matches applicants with more than 75 lenders to find the best loan option for a business. The initial application involves no formal credit check.
Any of these tools should help a business owner survive a short-term cash flow issue without it turning into a long-term problem. Think about which work best for your type of business and management style, then implement them into your business plan today.
About the Author
Rene Ferran has spent more than 25 years providing quality content to a variety of online and print publications. He spent 15 years as the lead high school sportswriter for the Tri-City Herald, where he honed his deadline writing skills and ability to quickly assess situations to produce clear, concise and compelling copy.
When he's not slumped over a keyboard, you can probably find him officiating a youth sports event or spending time with his wife and two teenage children.