Five Options for Companies that are Running Low on Cash

cash flow problemsRunning out of money is a common problem for startups and many small businesses. It’s one of the worst things that can happen to a business owner. Without money, you can’t pay salaries, vendors, or any bills. Unless you fix the problem quickly, you could go out of business.

One of the greatest misconceptions about cash flow problems is that they only happen to companies that are doing badly. This notion is incorrect. Cash flow problems can happen to companies that are doing well, usually because they are doing too well.

A number of cash flow problems can be solved if you find them early enough. Otherwise, they can snowball and get out of hand very quickly. As a matter of fact, the best way to handle a cash flow problem is to avoid it in the first place. This takes me to my next point.

If you can, build a cash reserve

One simple way to avoid cash flow problems is to build a cash reserve. This advice sounds simplistic but is incredibly effective. Having a cash reserve gives you breathing room and time to solve problems.

Start building a cash reserve as soon as your company begins making sales. Save some money into a special bank account. This step is difficult for businesses because the money just sits there in a bank account. You can’t spend this money on salaries or invest it in the company.

The reality is that building a cash reserve may slow down growth. However, the cash reserve gives you a safety net you can use if, or when, your company runs into problems. Consider this carefully when building your reserve.

Now, let’s review the five options that startups and small businesses can use if they are running low on money.

Option #1: Get a small government loan (yes, they exist!)

If you have a cash crunch and you need less than $50,000, consider a Microloan from the Small Business Administration (SBA). The SBA provides these loans to small companies that need money to grow or pay the bills. Here is a list of providers.

Microloans are easier to get than conventional financing. They are available to companies that don’t have much of a track record or whose owners don’t have assets. Furthermore, the SBA also provides business training with some of these loans. This training is invaluable for small business owners who need to shore up on financial management.

Option #2: Clients paying slowly? Finance your invoices

One common problem that affects companies that work with commercial clients is slow invoice payments. Most commercial clients, especially large companies, pay invoices in 30 to 90 days. They pay slowly for a very simple reason: it helps their cash flow.

However, many small businesses cannot wait four to eight weeks for payment. They need to get paid sooner because they have their own expenses to pay. As a matter of fact, many startups and growing companies don’t account for slow payments when planning their finances. Before long, they are out of money and all their resources are tied to slow-paying invoices.

One simple way to prevent this situation from happening is to offer your clients a discount for early payment. A discount, usually around 2%, can be a large enough incentive for clients to pay sooner. Often, you negotiate a payment in ten days or less. While simple, client discounts are not always effective and often have issues.

A better way to improve you cash flow quickly is to finance your invoices with a tool called invoice factoring. Instead of waiting 30 to 90 days for payment, you get funds advanced by a factoring company. The transaction closes when the customer pays the invoice in full. Small businesses often use factoring as a revolving line of financing.

Factoring is an effective way to improve cash flow and can be used to finance startups. It’s relatively easy to get. To qualify, your company needs to work with creditworthy clients and have reasonable profit margins

Option #3: Have a larger order? Finance your purchase order

Another reason small companies encounter cash flow problems is that they invest all their available money in fulfilling a large client purchase order. Much like the previous problem, purchase orders often have long fulfillment and payment cycles. In some cases it can take over 100 days to get paid, especially if you are using overseas vendors. Again, few startups and small businesses have the resources to wait that long for a payment.

One simple way to improve your cash flow is to finance the order with a tool called purchase order (PO) financing. It’s a highly specialized form of financing that only helps companies who sell goods – such as re-sellers and wholesalers. It cannot be used by direct manufacturing companies. PO financing provides funds to pay suppliers directly, which enables you to fulfill the order and book the revenue.

Option #4: Need to pay suppliers? Consider supplier financing

Sometimes you need to buy raw materials because your company manufactures goods directly. Or you may need to build inventory to capitalize on a future opportunity. Purchase order financing can’t help you in these circumstances.

An alternative is to use supplier financing, a form of supply chain financing. It helps manufacturers and product distributors that need to pay suppliers in order to fulfill an order or build inventory. It works with a finance company that extends commercial credit to your business and intermediates your supplier purchases. While this solution is very flexible, it’s available only to companies that meet some very specific requirements.

Option #5: Your last resort: Friends and family

If all else fails, consider asking your friends and family to invest in your company. Personally, I think this approach is a double-edged sword. Your company gets money, but it often has strings attached. It can also put your relationship with your friend/family investor at risk. Because of the risks, I prefer to avoid this type of funding.

Although I dislike this option, it is a viable form of funding that has been used successfully by many folks. Be careful if you use it. You should consider this type of funding only if your friend or family investor has knowledge about the business and has the money to invest.