What’s It Going to Cost Me If My Business Runs Out of Cash?

What's It Going to Cost Me If My Business Runs Out of Cash?

Cash is the lifeblood that runs through any business. Having a positive cash flow allows a business to keep running — buying inventory, paying employees, marketing the business and much more.

Unfortunately, that flow does not endlessly replenish itself. It takes careful planning to make sure your business is bringing in enough cash to cover expenses (and hopefully, make a profit as well). And it is very easy for a business to spend more than it brings in, especially if your business is in growth mode. That can lead to a cash-flow crisis that comes on more quickly than you might think.

Obviously, you want your business to avoid running out of cash if at all possible, and there are many ways to manage cash flow to prevent it. However, running out of cash CAN happen. What will it cost you if this worst-case scenario becomes a reality?

A Zero Balance Can Cost a Lot

It’s adding insult to injury, but running out of cash brings all kind of financial penalties, from fees to higher borrowing costs.

Bank Fees

If you go below a certain balance in your business account, you may get hit with fees. And if you don’t have enough in your bank account to cover payments you’ve made, fees for insufficient funds and/or overdrafts can start kicking in — and can add up quickly.

Loan Fees

If you’ve taken out a small-business loan, missing a payment or paying late classifies you as delinquent on your loan. A delinquency that goes on for a certain period of time turns into default. Lenders may charge you fees for late or missed payments; if the loan goes into default, they may turn to collection agencies and report you to credit bureaus.

If your loan was backed by a personal guarantee or the lender has a lien on your business assets, the lender may be able to seize your personal or business assets or foreclose on your property.

Many of these penalties can be forestalled by letting your lender know that you are having trouble but wish to pay what you owe. You may be able to negotiate extended repayment or other solutions that can help you avoid delinquency or default. If you ignore the problem, however, lenders will not hesitate to penalize you.

Credit Card Fees

Similarly, credit card issuers can extract heavy penalties for late payments. Fail to make your minimum payment on time, and you may find that your interest rate has skyrocketed — making it even harder to pay off any balances you might be carrying.

Vendor Terms

If you start making late payments to vendors, you can bet they’re going to rescind any favorable payment terms you might have. That may mean you owe balances sooner, or that you must pay in cash for goods or services. As with lenders, communicating openly with your vendors and negotiating for some leeway can often help avoid the worst consequences of a cash crisis.

Credit Score

Any problem with paying your bills on time will be reflected on your business credit score, and possibly your personal credit score as well. A lowered score can make it more difficult to get favorable credit terms in the future — or even to get credit at all.

Costs of Cash Life Support

Running out of cash doesn’t have to be a death sentence for your business. In some cases, a timely cash infusion can allow your business to live another day. Before you try to revive it, though, make sure you are being realistic about the long-term prospects of your business. If the business isn’t fundamentally viable, procuring cash might just be digging a deeper hole for you and the business to get out of later.

If you do decide to attempt to save the business, there are a variety of ways to get cash quickly to help, each with its own costs.

Conventional Borrowing

Traditional business loans often offer lower borrowing costs and longer-term repayment than some other types of loans. Microloans by the U.S. Small Business Administration (SBA) can be easier to get for small businesses without a long track record or assets. However, either of these loan types requires an extensive application process that can take months.

You can also borrow based on personal assets such as your 401(k) or your home. This type of borrowing can cost less than some other types, but you may be risking your own personal assets in the process.

Credit Cards

Credit cards can be useful in an emergency. Business credit cards can be easy to get if you have strong personal credit, but you may have to sign a personal guarantee — meaning that you are personally responsible for paying back any debt on the card. And if you carry a balance, interest can add up quickly, turning this into a very expensive way to borrow.

Family and Friends

You may be able to borrow from friends and/or family in a crisis. However, this can have high costs in terms of relationships if you’re unable to pay the loans back. If you decide to go this route, make sure your friends understand what they are getting into, and put a formal agreement in place so the terms are crystal clear to both sides.

Invoice Factoring

Invoice factoring involves selling a customer invoice to a factoring company for money up front. The factoring company advances most of the amount of your invoice to you (commonly 80 percent or more), and then gives you the rest once the customer pays. Your earnings will be less the factoring company’s fees, which can range from around 1 percent to 5 percent of the total invoice.

Invoice factoring can get you cash quickly, but it can be relatively expensive. Keep in mind that your total cost will be a combination of the factor rate and all other fees and costs, such as administrative fees or late fees. Factoring fees can be flat or tiered depending on how long it takes for the invoice to be paid.

Short-term Funding

Several online lenders offer short-term, unsecured loans with repayment periods that range from a few months to a few years. The borrowing costs of these types of loans can be high, but they can be easier to qualify for and you can often get funds quite quickly.

Learning Your Lesson

Once you’ve conquered your cash crisis, it’s time to come up with a plan to avoid further issues in the future and get your business on track. If you learn from your mistakes to craft a better future for your business, you can come back from the brink with solid fundamentals and careful planning.

How has your business come back after running out of cash? Let us know on Twitter @Revenued_com!

Jennifer Sokolowsky writes about finance, legal and tax topics for publications and companies including The Puget Sound Business Journal, Avalara, and Avvo.
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