Sooner or later a cash flow emergency will hit a small business. The many reasons for cash flow emergencies include lack of preparation, unexpected growth, or delayed customer payments. Regardless of the cause, the result is usually the same.
In the best-case scenario, you delay payments to suppliers and employees until the problem passes. This common strategy can work if you are lucky. If you are not lucky, things spiral out of control and you go out of business. Unfortunately, this worst-case scenario happens to many small business owners.
The best way to handle a cash flow emergency is to avoid one altogether by being prepared. In this article, we discuss how to prepare for a cash flow emergency.
Preparation is key: build a reserve
The simplest way to prepare for a cash flow emergency is to have proper cash reserves. A good start is to have enough funds to cover operations for a couple months; however, you should aim to have a reserve to cover six months of operating expenses.
The problem with this strategy is that few companies are able to save that much money. Most small businesses run on tight cash flows. Consequently, the alternative strategy is to use business financing to cover your expenses during challenging times.
Complement your reserves with financing
You could use various conventional financing solutions to solve a cash flow crisis. A business loan (or better, a line of credit) is certainly an option. However, qualifying for a business loan, especially in today’s banking market, is challenging. Most lending institutions provide lines of credit only to companies with strong financial statements and adequate collateral. Unfortunately, these requirements rule out most small businesses.
A better alternative may be to use invoice factoring, a financing solution that has been gaining popularity as a way to solve tough cash flow problems.
How factoring invoices improves cash flow
Solutions like factoring are designed specifically to help companies with cash flow problems caused by slow-paying customers. Actually, slow payments are the source of many cash flow shortages. In most commercial sales, it’s common to deliver the goods/services and then wait 30 to 60 days for payment. This delay can affect small and medium-sized companies, who cannot afford to wait that long to get paid.
Invoice factoring solves this problem by accelerating the funds from the customer payment, providing the liquidity the company needs to meet obligations and expand. Most invoice factoring transactions are structured by selling invoices to a financial intermediary, the factoring company, that provides an upfront payment and then holds the invoice until the customer pays.
This solution provides your company with immediate funds. The transaction closes and settles when the customer pays the invoice in full. Most companies that use this form of financing factor their invoices regularly, giving them cash on hand when needed.
For more information, please read “What is factoring?”
Invoice factoring is easy to get
One advantage of invoice factoring is that it’s easier to obtain than most conventional forms of financing. Additionally, most factoring lines can be set up for initial funding in a week or two.
The most important requirement is the credit quality of your customers. Factoring companies only buy invoices with high credit quality, so your customers (not your business) should have solid commercial credit scores. Additionally, your invoices should not be encumbered by legal problems or tax liens.
Get more information
Have a cash flow emergency? We can provide you with a factoring line that has high advances at low rates. For information. get an online quote or call (877) 300 3258.