How Can Small-Business Owners Handle a Cash Shortage?

Restaurant owner standing in his empty restaurant.
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Even the most successful business may experience financial hardship at certain times. The pandemic put a significant dent in many small businesses’ cash flow, forcing owners to scramble to come up with solutions. Though the government provided some financial support, there may not always be such simple solutions for cash flow problems. Here, small-business owners and financial experts discuss how small-business owners can handle a cash shortage.

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Identify the Root Cause

Karen Cate Agustin, a business analyst with Investors Club, recommends that when you hit a cash flow problem, before you do anything else, “It is critical to identify the root cause. In my experience from our business, the primary cause of cash shortage is improper management of incoming cash flow. It is common for clients to mess up paying their bills on time. The best solution to this problem is to encourage clients to pay on time innovatively. For example, we have a 2.5 percent discount policy for those who pay on time. It provides the reason for early payment and creates a sense of urgency, and most clients pay on time.”

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Negotiate With Suppliers

It’s important to keep lines of communication open with your suppliers, said Ellie Shippey, digital marketing specialist. “If you’ve been loyal to a vendor, chances are he or she will be more flexible and willing to work with you in a pinch. Your utility companies may also be able to give you some wiggle room or even reduce your bill.”

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Sell Nonessential Assets

In a cash flow crisis, you can also sell off nonessential business assets to save money, Shippey said. “In the event that you find yourself in a pinch and need to raise some quick cash, selling an unwanted item can be a good option.”

Steve Elliott, franchise owner of Restoration1, added, “Equipment that is idle, old, and inoperable occupies space and locks up cash that may be utilized more profitably. Long-owned equipment will often have a book value equal to or less than its salvage value, so its sale may result in a taxable gain. This gain must be included in your tax returns. However, if you must sell below book value, you will incur a tax loss, which may be used to offset other business gains.”

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Boost the Pace of Your Receivables

Your business’ financial issues will be resolved as soon as money starts coming in faster, said Jason Porter, a senior investment manager at Scottish Heritage SG. “Start by making a product available for pre-order and accepting them before production begins. Additionally, you can request a down payment or partial payment from new clients.”

Change Your Invoice Collection Method

Another strategy to improve cash flow is to change your invoice collection to increase cash flow, according to Bill Ryze, a certified chartered financial consultant from Tennessee and a board advisor at Fiona. This can look like sending out invoices within a shorter duration or shortening the payment terms. “For example, if you send out an invoice weekly with a one-month repayment period, you can switch it to sending out the invoice weekly with a two-week repayment duration. You can explain the situation to customers with whom you have built a solid relationship and ask for prompt payment.”

Scott O’Brien, head of sales at PPC Ad Lab, added, “The longer you remain out of contact with a customer, the less likely it is that you will be able to collect the debt. Consider giving incentives to consumers who promptly pay their invoices. Additionally, make it as simple as possible for consumers to pay you.”

Slash Your Costs

During a cash flow crisis, businesses must be extra vigilant of expenditure, said Lulu Albanna, co-founder of WRC Media. “When you’re strapped for cash, your company’s expenses take precedence over all else. Reduce your expenditures to only those that are necessary to keep your business running and generating revenue.”

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Renegotiate With Lenders

Once you realize a cash flow shortage, consider reaching out to your lenders, Ryze said. “One thing I have noted with my clients who are small business owners, they are unaware that lenders are always willing to renegotiate the loan repayments before you start missing your payment. Letting lenders know about your current cash flow challenge can help you find a new repayment plan, but if you wait till you miss a payment, it could escalate issues depending on the terms of your credit.”

Explore Other Financing Options

A good place to start is to explore all your financing options, said Andrew Gonzales, president of BusinessLoans.com. “There are many different types of loans and financing available to small business owners, so be sure to research your options and compare interest rates and terms,” Gonzales said.

Some loans for small-business owners include the SBA 7(a) Loan, the SBA 504 Loan and the Microloan.

There are other loans that exist just for this kind of problem, according to Erik Wright, owner and CEO of the New Horizon Home Buyers. “Quick Loans for Working Capital is one way to solve business cash flow problems. Working capital short-term loans are simple to obtain and can be funded in as little as one business day. In comparison to many other lending choices, these loans have a higher annual percentage rate (APR). Given that a business borrows money for a shorter period of time, the overall cost of capital may be less expensive than longer-term options with a lower APR.”

Another option, according to Eyal Pasternak, a real estate investor and the founder of Liberty House Buying Group, is to get a business line of credit. “[It] won’t be costly to you in the future as you will only be liable to pay interest on the outstanding payment and not the entire credit limit just like how a credit works. If you have good credit, you will face a lower interest rate with many other incentives for small businesses.” 

Prioritize Sales

Maybe a cash flow crisis is a time to set sales goals to drive revenue, said Ronald Williams, founder of BestPeopleFinder. “That’s what we did. It is no use thinking only of cost reduction; it is necessary to increase revenues. Therefore, define an action plan with the values that will be the goals of your business and how you plan to achieve them. Keep in mind that in times of crisis or cost containment, it is also necessary to invest.”

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About the Author

Jordan Rosenfeld is a freelance writer and author of nine books. She holds a B.A. from Sonoma State University and an MFA from Bennington College. Her articles and essays about finances and other topics has appeared in a wide range of publications and clients, including The Atlantic, The Billfold, Good Magazine, GoBanking Rates, Daily Worth, Quartz, Medical Economics, The New York Times, Ozy, Paypal, The Washington Post and for numerous business clients. As someone who had to learn many of her lessons about money the hard way, she enjoys writing about personal finance to empower and educate people on how to make the most of what they have and live a better quality of life.

 

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