Cash flow gaps are common for small businesses. The flow of capital in and out of your business is what makes it operate. But, if more capital goes out than it comes in, business owners start facing problems. One of the biggest roadblocks in your cash flow is slow-paying or non-paying customers. The lack of inventory management systems is another issue to consider. If you are a beginner and do not operate with automated accounting, you face even more challenges. Let’s discuss today the primary means you have to bridge cash flow gaps in your startup business.
1. Make it Easier for Customers to Pay You
A survey conducted by the National Federation of Independent Business a few years back showed concerning data. More than half of small businesses dealt with clients who delayed payment for more than 60 days. Since then, things might have become a little better, but not by much. Small businesses still struggle with late-paying clients. Large companies hoard cash and pay late, thinking little of the startups delivering them products or services. In turn, small firms do not want to lose big clients, even if they pay late. So, here are some ideas you could implement to incentivize your customers to pay on time:
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- Try to get a down payment or a retainer in advance for a large order you will fulfill. It is not a crime for a small business in our current economic landscape to ask for an advance. Use it to cover some expenses until you deliver.
- Negotiate multiple payment terms. If you ask for a 25% advance to cover stock, set the next payment at 50% to pay your suppliers and fees. Then, ask for the rest upon completion.
- Accept credit cards. Most small businesses dread credit card processing fees. However, they are preferable to waiting for a few months to receive your hard-worked money.
- Automate your accounting software to allow clients to pay online or send them reminders regarding their due dates.
- Invest in a mobile paying device (P.O.S.) for jobs you do on-site so clients can pay you on the spot. It saves you from waiting for them to pay the bill sometime later.
2. Get a Merchant Cash Advance
Merchant Cash Advance is a type of business loan dedicated to startups and small businesses. The differences between an M.C.A. and a traditional business loan are many. First, you do not need to worry about collateral or fixed monthly rates. You repay your lender in a structured schedule, depending on your sales. A Merchant Cash Advance is a structured lump sum you receive from the lender. You get the money fast in exchange for a fee or a percentage of your future credit or debit card sales. Such type of loan is increasingly popular. It allows you access to large sums of money in a couple of days. You should make sure you have high transaction volumes to manage this type of loan.
With Merchant Cash Advances, you do not have to worry about low credit business scores or no scores. The way you manage your personal finances does not matter either. Lenders care more about your future as a company and the projected sales. Such business loan works best for retailers relying on future high-grossing sales, restaurants, or medical offices. More businesses currently apply for M.C.A.s with high rates of success: seasonal service providers, event planners, etc.
The criteria to get an M.C.A. is reasonable. You do not have to worry about your FICO or Experian business credit score. Most young companies do not even have enough credit history to consider traditional business loans. You need to project realistic sales in the future and refrain from taking another M.C.A. before you repay the first one.
3. Invoice Factoring
Another way to fund your cash flow is invoice factoring. You can sell your clients’ outstanding unpaid invoices to third-party entities against a discount. Then, these factoring companies chase your clients to receive the money. You might wonder why you would sell invoices for 70%-85% of their value. Financial experts say it is better than waiting 90 days for your customers to pay their debts to you.
Invoice factoring is also a type of alternative lending or small business financing. A factoring entity (financial groups, banks, etc.) unlock the funds tied up in your unpaid invoices. It makes cash flow management easier for you. They also provide credit control, so you do not have to waste time chasing late-paying customers.
The downside of invoice factoring is that it binds you to lengthy contracts. Such companies want to manage and fund all your sales, not only a couple of customer accounts. You might have a difficult time getting out of such a contract. Also, in time, such deals prove costly for small businesses due to extra fees.
If you want to apply for invoice factoring, make sure you have more than just one or two big clients. It is a system working best for B2B companies dealing with tens of customers. Nevertheless, it can be a great system if you accept the conditions and solve cash flow problems in the long term.
Many cash flow specialists advise you to sell products with higher margins, offer discounts and promotions, manage stock better, etc. They are all sound ideas, but the reality is more complicated than that. Small businesses need to spend a lot of money to make some money. In this case, cash flow problems become chronic.
Start small by making significant changes in how you bill your clients and collect what they owe you. Automate your accounting software and keep a monthly cash flow balance. Negotiate with your customers and suppliers for adjusted payment schedules to optimize the cash flow cycle. If you need large amounts, go for an alternative lending option (an M.C.A., a business line of credit, etc.) or invoice-based funding.
Anything you do, be realistic of your expectations. Prepare for hefty repayments on loans and project your future sales factoring in all variables.