Small businesses (defined as businesses with fewer than 500 employees) account for 99.7 percent of all business in the United States, making them a fundamental part of the economy. But anyone who’s ever owned a small business can tell you that it’s not always easy to stay afloat when it comes to competition and cash flow. Bankruptcies in the U.S. increased from 24,000 to more than 25,000 between the first two quarters alone in 2016, so if your business is struggling to make financial ends meet, we have some suggestions for improving your small business cash flow.
There are several viable solutions that can help you stay afloat, even if you’ve hit some momentary bumps or you’re dealing with clients who are taking weeks and months to pay. Here are some of the most common cash flow problems small businesses face as well as how to best resolve them.
Lack of Funding
Many small businesses experience a lack of funding at some point or another, but it can stem from several causes — not enough business, clients not paying, spending more than you’re making.
One solution — if you have the credit — is to apply for a small business line of credit, which is similar to how a typical credit card works.
In a small business line of credit, you pay interest on your outstanding balance only, rather than the total line of credit. Your available credit increases and becomes available for borrowing once you pay down your balance, just like a credit card.
As mentioned, you typically need to have a high enough credit score to get approved for a business line of credit. For this reason, new businesses can struggle to gain momentum early on because they don’t have sufficient business and credit history.
Generating new business is difficult if you’re a startup or a young company with no industry reputation to leverage. You’re competing against other companies with years of experience on you, and you have no easy way to get your name in front of potential clients without having money to spend on advertising, which can be costly. And because you’re unestablished, you can’t turn to banks.
Most companies hit rough patches, and their credit can take a hit if they don’t have the funds to pay their bills because clients aren’t paying on time. This limits the amount of funding options available for small business owners.
Poor or no credit history is one reason why many small business owners are turning to small business invoice factoring to increase their cash flow. Invoice factoring is a type of accounts receivable financing that converts outstanding invoices due within 30, 60, or 90 days to improve your small business cash flow.
Unlike a bank loan, invoice factoring doesn’t hold your credit history against you. Instead, factoring companies look at the credit of your clients when determining whether you qualify. This could be a solution for small businesses looking for capital without using banks.
Nearly 60 percent of invoices are paid late, causing a potential chain reaction through your business and your personal lives. If clients pay late, you pay your bills late, your credit suffers, and the snowball continues.
Many small business owners do not have the savings necessary to float payroll, vendor payments and other business operations for weeks or even months. Your clients may have existing terms that make it difficult for you to predict when you can pay your people or your bills.
Small business invoice factoring can help here, too. If you have unpaid invoices in hand, the factoring company will fund you most of that total, minus a small fee, and then work with your client on payment. As a result, you get your money, and you get back the time you’re losing trying to collect from your client.