If you run your own company and are looking for ways on how to solve cash flow problems, this guide contains recommendations for how to identify and fix these issues. Some solutions include negotiating terms with vendors, reducing unnecessary expenses, and getting additional funding from loans and other sources.
Bluevine, for instance, is a lender we recommend if you want to get additional funding. It issues a small business line of credit that you can use to cover cash flow shortages. You can get up to $250,000 in funding in as little as 24 hours.
1. Determine the Impact of Your Cash Flow Shortage
When it comes to solving cash flow problems, one of the first steps we recommend taking is to identify how it’s impacting your business. Having a cash flow shortage can affect various aspects of your business credit and finances. This will help you figure out the frequency and severity so that you know how quickly you might need to address the issue.
Identify the impact to your business finances and credit
Shortages in cash flow can impact both your business revenue and expenses. Revenue, for instance, can be negatively impacted if you are unable to restock inventory. Without sufficient levels of inventory, you could see your sales drop.
Your business expenses can also be affected. For example, if a cash flow shortage results in the inability to pay business debts, you may be charged additional late fees. Depending on the timing of your payment, your business credit may also be negatively impacted, something that can result in lenders charging you higher rates and fees for loans.
Figure out the frequency and amount of the cash flow shortage
Determining how much and how frequently you’re typically short on funds is another thing that can help you determine how quickly you may need to look at your business cash flow problems.
For example, if you’re only short on funds several months throughout the year, you may just need to reallocate your funds from your higher-earning months to account for the seasonality of your product or service. Meanwhile, if you have a shortage regularly, you may need to take a more detailed look at your business income and expenses.
2. Determine the Amount and Source of the Cash Flow Shortage
For the next solution on how to solve cash flow problems, you should start with your business budget. Break down your income sources and expenses while also taking a look at the timing of these items. Once you’ve determined when you typically have a cash flow shortage and the average dollar amount, you can start to see if you can shift your income or expenses to resolve the shortage.
Identify when you receive funds from income sources
Income sources can include revenue you earn from sales and funds received from third-party vendors. This can include accounts receivables and sales you have made and issued invoices on but have not yet received payment for, or an outstanding invoice.
An important item to note, however, is that while some items may be recorded as income, you should consider when you receive the funds for purposes of determining the source of your cash flow shortage. This can help you later identify if you need to adjust the terms of your invoices to encourage faster repayment or make other arrangements such as getting funding from something like invoice financing to cover temporary cash flow shortages.
Create a list of when you must pay business expenses
Business expenses can include things like payroll expenses, loan payments, lease payments, inventory costs, and landscaping. To get a list of all expenses more easily, you can review your business bank statements to identify outflow of funds.
We recommend reviewing at least the past 12 months to capture as many expenses as possible as some of the costs associated with running a company may not be charged on a monthly basis. Insurance premiums, for instance, might only be paid on an annual basis.
3. Reduce Unnecessary Business Expenses
Cutting down on business expenses can be an easy solution to solving cash flow problems. You can use our worksheet on common IRS business expenses as a start. Be careful, however, not to eliminate an item that helps generate revenue or sales. You can do this by analyzing the return on investment (ROI) you’re getting from things you’re paying for.
Some examples of expenses you can consider eliminating or reducing can include:
- Landscaping and pest control
- Loan payments for business equipment
- Leasing expenses for office space
- Fees you’re paying for business software
- Fees for phone, computer support, and internet
If you’re unable to eliminate certain expenses, check if there are any cheaper alternatives with other providers. You can also consider reducing the frequency at which you have certain services performed. Finally, refinancing loans can also help by lowering monthly payments and reducing your interest rate.
4. Encourage Faster Repayment of Income
If you don’t always receive funds after making a sale, there are some methods you can utilize to encourage customers and vendors to make payments more quickly.
Provide volume discounts
If you need funds quickly, providing a volume discount on orders can encourage customers to buy more than what they may initially need. This can provide your company with a much-needed infusion of funds while also allowing your clients to save money in the long run. This is something that can also lead to a more loyal customer base, which can yield additional long-term profits for your business.
Offer discounted prices for repeat customers
To encourage a more stable and consistent source of revenue, you can offer discounts to repeat customers. Discounts can be issued based on the number of orders placed in a specified time frame, or the dollar amount of orders placed. Depending on your company’s product or service, you can also consider offering discounts for customers who agree to sign a contract for a minimum period of time.
Allow discounts for automatic payments
Offering your clients an incentive for automatic payments can ensure not only more consistency as far as when you’ll receive payment, but it can also reduce the likelihood of your customers being delinquent.
Accept more methods of payment
If your business accepts more forms of payment, it can make it easier for customers to send you funds. Forms of payment you can consider accepting can include the following:
- Credit cards (American Express, Discover, Visa, and Mastercard)
- Peer-to-peer (P2P) payment methods, such as Venmo or PayPal
- Online payments
- Wire transfers
Some forms of payment assess fees, so you’ll want to make sure that the costs you incur from accepting additional forms of payment provide a sufficiently high ROI to justify the added expenses.
Provide discounts for paying with cash
To avoid the fees associated with accepting certain payment methods, you can encourage customers to pay with cash by offering a discount. Check out our guide on cash discounting for more details on how it works and what federal regulations you might need to be aware of.
Offer early payment discounts & discourage late payments
Offering an early payment discount can encourage customers to pay you more quickly. Be careful to not issue so large of a discount that it cuts into your net profit by too much. In addition to offering early payment discounts, charging late fees can give customers another incentive to pay invoices in a timely manner.
When considering how much to charge for late fees, don’t forget to consider any state or federal regulations that may limit the amount that can be charged. Charging too much may land you in trouble from a compliance perspective, something that can lead to additional fines and penalties.
5. Negotiate Payment Terms on Business Debts
Another option for solving cash flow problems is to negotiate the terms of your existing business debts. You can use many of the same techniques mentioned above, except instead of offering terms to your customers, you can request better pricing from your creditors or suppliers.
Ask for extended payment terms
If any of your vendors or suppliers offer you a grace period, you can ask them for more time to make payment in full without incurring any penalties. Some vendors require payment that is due on receipt, but you can ask for terms as long as 30 to 90 or more days to allow your business more time to hold onto funds.
Request discounted pricing
Just like you can offer discounted pricing to customers as a way to encourage faster repayment, you can do the same with your suppliers. For example, you can request discounts for being a long-time customer, being a repeat customer, or making payments in an alternative manner.
Refinance debt to a lower interest rate or longer term
When you refinance debt, you often can choose a lower rate and a different loan term. A lower interest rate can reduce the interest charges you pay over the life of the loan, while a longer loan term can reduce your total monthly payments by spreading the cost over a longer period.
If you decide to refinance debt, don’t forget to account for any origination fees or costs associated with getting a new loan. Also consider the possibility that while a refinance may help in the short term with your cash flow, it could be detrimental in the long run—depending on the total interest charges and loan fees you’ll be paying.
6. Build an Emergency Fund
If you have an emergency fund for your business, you’ll have the ability to draw funds from it to cover temporary shortages in cash. This can help pay for emergencies, cover unexpected expenses, or a decrease in sales due to seasonality or other factors.
You can adjust the size of your emergency fund based on the frequency and dollar amount you typically fall short. At a minimum, we recommend having enough reserves to cover at least six months of operating expenses.
7. Get Additional Funding
Additional sources of funding can come from business loans, personal loans, or retirement accounts. If you’ll be getting a loan, you’ll need to meet a lender’s approval criteria. For this, we recommend reading our guide on the 5 Cs of credit to better understand how your loan application may be evaluated.
Get short-term loans for working capital
Short-term business loans typically allow funds to be used for a wide variety of business purposes. Some examples include payroll, inventory, rent, utilities, and other daily expenses. Short-term loans can often be issued in as little as one business day, but in exchange, they often carry higher interest rates compared to traditional loans. They also have a short repayment term, usually between several months to three years.
If you want to get a working capital loan, we recommend National Funding, which provides excellent customer service and customized loan options with up to $400,000 in funding. Depending on your business qualifications and loan details, you could also qualify for same-day funding.
Use a small business line of credit
A small business line of credit gives you the ability to draw funds on an as-needed basis. It’s a revolving credit line that allows you to draw funds up to the maximum credit limit you’re given, with interest charges only being applied to your outstanding balance. Just like with short-term loans, many small business line of credit providers allow funds to be used for any business purpose.
Bluevine is a lender we recommend for a small business line of credit. It offers up to $250,000 in funding and repayment terms as long as 12 months. You can also get funded in as little as 24 hours.
Apply for a small business credit card
With a business credit card, you’ll have a revolving line of credit you can use to make business-related purchases. It is ideal for small or medium expenses, recurring costs, and daily purchases.
Business credit cards give you the option to pay only a small portion of your outstanding balance, although the annual percentage rate (APR) is typically above 20%. As a result, it’s best to pay off the balance in full or within several months if you want to reduce the interest charges.
Many business credit cards also have a rewards program offering cash back or points that can be redeemed for merchandise or travel rewards. We recommend considering the U.S Bank Business Triple Cash Rewards World Elite Mastercard®. It can offer up to 5% cash back on eligible purchases and is currently also offering a 0% intro APR on purchases and balance transfer for 15 billing cycles.
Apply for personal loans for business purposes
If your business credit is not good enough to get a business loan, personal loans for business purposes can be a good alternative. These loans focus on your personal credit as part of the qualification process. Personal loans can include lines of credit, term loans, and secured loans, such as home equity loans and home equity lines of credit.
If you’re looking for a personal loan for business purposes, consider checking out Upstart. It tops our list of the best personal loans for business funding, offering up to $50,000 in funding in as little as 24 hours.
Access your retirement savings with a rollover for business startups (ROBS)
With a ROBS, you have the ability to access your retirement funds tax- and penalty-free. A ROBS is not a loan, so it’s easier to get as it does not have many of the small business loan requirements commonly associated with a typical loan such as a minimum credit score, time in business, or revenue. Rather, one of the few requirements to get a ROBS is to have a minimum balance of around $50,000 in your retirement accounts.
A ROBS is a complex transaction that can result in fines and penalties if done incorrectly, so we recommend using the service of a ROBS provider like Guidant Financial to walk you through the process. The provider has comprehensive legal and audit support services as well as a satisfaction guarantee for its services.
Frequently Asked Questions (FAQs)
Cash flow can be improved by adjusting the timing of making debt payments and of receiving income. Other methods include reducing business debt by refinancing debt, negotiating terms with creditors, and reducing unnecessary expenses. You can also increase income by encouraging faster repayment of invoices and offering discounts.
Cash flow can negatively impact a company’s credit and finances. Without sufficient funds, a business can struggle to make debt payments in a timely manner. Not having sufficient funds can also hinder a company’s ability to restock inventory, something that can hurt its sales.
Reviewing at least the past 12 months of business bank statements can help you identify all of your recurring and less frequently occurring business expenses. Statements to payments made to business credit cards should also be reviewed.
Bottom Line
You now know the many solutions to how to solve cash flow problems. You can reduce unnecessary business expenses, encourage faster repayment of accounts receivables, negotiate more flexible terms with vendors, and more.
If you’ll be getting a loan, the tips we mention in our article on how to get a small business loan can increase your approval odds. Depending on the severity of your cash flow issues, you can choose to employ one or multiple solutions we’ve identified in this guide.
