Cash flow may very well be the biggest challenge for upcoming and small businesses. Ironically, it’s also one of the very lifelines that keeps a business alive during a crisis or when the market is tight.
From the inception of a company to its subsequent branding, from the manufacturing of the products to marketing, selling, and shipping, and from digitalization to all kinds of legal and logistical fees, cash is always at the upfront of everything in the world of business.
However, like I said, maintaining a positive cash flow at all times is rather hard for even the most profitable of companies, let alone small scale businesses and start-ups alike. In fact, insufficient, inconsistent, or lack of cash is the biggest reason for 82% of failed businesses.
There are many factors that can hamper the financial state of a small business and cause a cash flow crisis. for instance:
- Lack of sales and revenue
- Delayed payment by customers
- Hike in operating expenses
- Scarcity of finance and investment activities
- Healthcare and employee welfare
As you can see, there are a variety of elements that can trigger a financial crisis and put you in the back seat. But that doesn’t mean that there is no way out, does it?
To our luck, there are a number of methods that you can use to manage a cash flow crisis without taking a severe hit on your business. And that’s exactly what we shall be talking about in this post.
So without further ado, let’s learn 8 of the most effective ways that small businesses can use as legit funding options to solve a major cash flow crisis:
1. Invoice Financing/ Factoring
Invoice financing aka factoring is the process of obtaining cash by selling your accounts receivables to financial institutions commonly referred to as factors.
In simple terms, it means taking advance payments on the bills that customers haven’t paid yet from an invoice finance service which you can return in 3-6 months at a small fee.
Or you can sell your outstanding invoices or receivables directly to a factoring company at a discounted price to get 75-80% of the payment instantly. The rest of the amount gets credited back to you once the customer clears the outstanding dues with the factoring company.
2. Small Business Administration (SBA) Loans
SBA micro-loans are government-backed loans made available through non-profit community development institutions.
Unlike traditional business loans, SBA loans are specifically designed for entrepreneurs and small businesses with reasonable terms and conditions. Although, a little expensive, with about 8-13% of interest rates, SBA loans are rather easy to access if you apply for them via a verified lender.
3. Merchant Cash Advances
One of the quickest ways of obtaining cash, especially in times of crisis is merchant cash advances.
It’s where a lender would provide you with a lump sum of money against a small cut of your credit/ debit card sales until you pay the entire advance back.
Albeit convenient, merchant cash advances are rather expensive and should only be resorted to should you fail to get the amount with other funding options.
4. Business Line of Credit
One of the most common ways for small businesses to get funding is by purchasing a business line of credit which pretty much works the same way as traditional credit cards.
The higher your credit, the lower the interest rates, and the easier it is for you to borrow again and again as long as you pay the owed amount in time.
5. Peer-to-Peer Lending
Another fast process of getting instant cash approval is the all-new peer-to-peer lending which for the most part can be done entirely over the internet. There are many sites like Funding Circle and Lending Club that act as a mediator between investors and borrowers to help get you the capital you need in an instant, given that you have a good credit score.
And should you have an exceptional credit score, chances are you might secure the loan at as low as 4.99% annual interest.
Crowdfunding is an old method of raising funds by turning to friends and family. In the digital era, it has evolved in the form of online websites where you can go and borrow small funds from several small investors instead of focusing on a single investment option.
The most popular crowdfunding platforms that you can check right now are Kickstarter and Indiegogo.
7. Private Lenders
One of the biggest changes that occurred in the post-recession phase of 2008 was the rise of numerous private lenders including non-bank and outside investors such as angel investors and venture capitalists.
It’s where an investor would trade his capital against your equity, or put simply, provide you with the desired amount of money by taking some sort of control over your company.
8. Business Credit Cards
Credit cards are the perfect life saviors in times of urgency. The same goes for business credit cards which you can use for minor payments and operations that do not need a larger line of credit or extra charges in case of delayed payments.
Bottom line is that while businesses do require positive cash flow on a continuous basis, it isn’t always feasible considering the high costs of operational activities. And therefore, you got to have certain funding options by your side at all times to help you solve a cash flow crisis in times of emergencies.