What Are My Options If I Run Out of Business Cash Flow?

​What Are My Options If I Run Out of Business Cash Flow?

No business wants to experience an empty bank account, but running out of cash flow can happen, especially for new and small businesses without a lot of reserves. Running out of funds to pay your business expenses is a serious event that can quickly spell the death of your business. But there are plenty of options you can explore to get through a cash dry spell and get your business back on its feet.

1. Cut Cash Expenses

If you find yourself out of cash, one option is to stop or delay your cash outflows. In many cases, you can give your business a last-minute reprieve by negotiating with your creditors.

  • Talk to your landlord: You may be able to delay paying rent for a few months or even get a period of free rent by negotiating with your landlord.
  • Negotiate with vendors/suppliers: See if you can get better terms such as more time to pay or even free service for a period of time.
  • Find new vendors that will give you a break: Shop around for new suppliers and see if you can negotiate more favorable terms than your current vendors offer.
  • Cut staff: Laying off employees isn’t a pleasant option, but it may have to be done, starting with the least experienced/integral staffers.

2. Get Paid Sooner

When small businesses run out of money, it’s often caused by slow payments from customers. The sale has been made and your product or service has been delivered, but your customer’s payment has not come in to the business yet — and you have bills to pay. There are ways to speed up this process and get the money your business is owed sooner to keep your cash flowing.

Work With Your Customers

If you give your customers a lot of time to pay you, see if you can renegotiate terms that are more favorable to you. You can also offer a small discount for prompt payment or offer incentives for prepayment.

Invoice Factoring and Financing

Another way to get invoice payments flowing into your accounts earlier is factoring, or selling a customer invoice to a factoring company. In exchange, the company advances most of the invoice amount to you (commonly 80 percent or more) and sends the rest once your customer pays, minus fees (which can range from around 1 percent to 5 percent).

While factoring can provide you with quick cash and can be easier to get than traditional financing, it can be expensive — you need to watch for hidden fees. Since the factoring company collects from your clients for you, you also need to trust that it will deal with your customers in a professional way that doesn’t affect your relationship with them.

Invoice financing, on the other hand, means that you borrow money from a lender with your invoices as collateral. You collect the invoices yourself and pay the lender back on agreed terms.

3. Selling off Inventory

Getting rid of inventory can provide your company some cash to get you through a crisis. However, if you want to generate cash quickly, you may have to sell your goods at a loss. This may or may not be worth it, so consider your situation carefully before proceeding.

4. Credit Cards

A business credit card can be a useful tool in managing cash flow while also offering perks such as reward programs. If you have strong personal credit, business credit cards can be easy to get, but you may have to sign a personal guarantee. This means you are personally responsible for paying back any debt on the card — and interest can add up quickly if you don’t pay off your balances on time.

5. Borrowing

Another solution to cash-flow problems is borrowing for an injection of cash. But be careful: If the fundamentals of your business aren’t sound or you don’t have any foreseeable revenue, a loan could put your business deeper in debt with no way to repay it. Borrowing is best to bridge temporary cash-flow issues, take advantage of opportunities or help fuel growth. There are several types of borrowing you can look into:

Traditional Bank Loans

Borrowing money from a bank can be difficult for small businesses that don’t have any collateral (something of value that the bank can take if you default on the loan). However, if you do qualify, bank loans can offer lower borrowing costs and longer-term repayment than some other types of loans.

SBA Microloans

Microloans by the U.S. Small Business Administration (SBA) are designed for businesses that can’t get other financing on their own, so they can be easier to get than conventional bank loans for small businesses without a long track record or assets. The SBA doesn’t actually lend the money, but it secures part of these loans for intermediary lenders so they have less risk. The loans themselves, which can go up to $50,000, are made through nonprofit lenders and can be used for working capital, supplies, inventory and equipment. Some SBA microloan lenders also offer business training to their borrowers.

Personal Loans

You can also borrow based on personal assets to help your business out of a cash flow jam. Options include borrowing from your 401(k), or, if you own a home, taking out an equity loan or opening a line of credit. A revolving line of credit works like a credit card, allowing you to borrow up to a certain amount as needed. You are charged interest only on the amount you take out. Of course, the catch on this type of borrowing is that you may be risking your own personal assets to fund your business.

Short-term Funding

Several online lenders offer short-term, unsecured loans with repayment periods of between a couple of months to a few years. The borrowing costs of these types of loans are generally higher than for traditional bank loans, but short-term loans are often easier to qualify for. If you are a new business or have poor credit, you may be able to get funds quickly.

Asking Friends and Family

You may be able to turn to your “warm market” (network of friends and family) to help you with a short-term loan or invest in your business over the longer term. However, if you choose to go this route, tread carefully. Make sure your friends understand what they are getting into and have a formal agreement in place so the terms are crystal clear to both sides.

Back Into the Swing

Once your cash flow crisis has been averted, you need to take a good look at your business and figure out how to avoid cash flow problems in the future. Your best solution to running out of cash flow is always prevention, so take the necessary steps now to prevent cash flow drama down the road.

How have you solved a cash-flow crisis? 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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