We hear from business owners every day who frequently share the same questions about small business financing. Here are answers to the top 5 most-asked questions:
Q: How can I get clients to pay on time? When they pay late, I have to make a major effort to cover all of my expenses.
A: The best thing you can do is keep the lines of communication open. Attempt to solve the situation in a cordial manner first. Consider giving your client a weekly reminder call, and offer to take a credit card payment over the phone. Offer a payment plan if you feel the client is struggling financially. Rebill overdue invoices immediately.
- Tip: You can incentivize quicker payment by offering a discount for cash on delivery (COD) or net ten days—give your client the chance to save, say, 2-3 percent for quick payments.
Q: I’m unable to secure a line of credit for my business—what are my options? How can I keep the lights on?
A: This is precisely why we started Reliant Funding: to support small businesses with cash flow challenges. If you are unable to get a line of credit, consider applying for a merchant cash advance, an advance on your future sales that is only paid back as the sales happen.
- Tip:: If you want to access credit in the future, you will need to rebuild your credit; this will take time. Until then, focus on selling the inventory you have, and cut expenses wherever possible. Pay cash for any services and restocking needs until you’re on solid ground again. Keep a firm grip on your finances with strong cash flow management and forecasting practices.
Q: My cash reserves get annihilated when I pay the monthly bills. How can I get on top of this?
A: Don’t pay everything at once. A lump sum payment could be a huge blow to your cash flow—you have to hope that you have enough cash set aside as a buffer or that your upcoming sales will float you. Instead, establish a “holding pattern” for your outgoing payments.
Organize your payees into tiers:
- Must pay – This includes items like payroll, rent, taxes or already-late bills.
- Important to pay – This may include utilities with a grace period for payment or payees that impose only modest financial penalties.
- Flexible payments – This should include any suppliers or vendors who are willing to work with you or are able to accept smaller payments, as long as they are regular. Most suppliers to small businesses are understanding of “stressful” financial situations and will continue to deliver—just keep the lines of communication open and make regular payments, however small.
Q: What options do mom & pop size businesses have for getting occasional loans to help with cash flow?
A: A line of credit is one common, simple way to have money available when you need it. Another option is to apply for capital funding in the form of a merchant cash advance, which is working capital provided in anticipation of your future sales. It’s not a loan—it’s an advance on your sales. Almost any kind of business can get one, but this an especially convenient option if you are unable to get a line of credit.
Q: Is there an easy way to determine how much cash I should keep in reserve? Is there a formula?
A: A good rule of thumb is the “3-6 months” rule. The idea of cash reserves is, in part, to make sure you can cover any slow months or unexpected crises. As such, you should be reasonably safe if you keep enough to cover 3-6 months’ operating expenses, including variable expenses. Account for “unknowns,” too.