A cashflow crunch can come from a variety of situations. For example, you may be heading into a busy season and need to invest in higher levels of inventory and labor, however, you find out that your available sources of capital aren’t enough to meet said demand.
There are a multitude of other scenarios that could cause a cashflow crunch, including:
- You’re heading into a slow season, but the expenses of the business are still high and the reduction in sales is causing issues with meeting various forms of payroll and other invoice payments on time.
- You have a piece of major operating equipment go out and need to replace it.
- You set your customers up on Net D payment terms, allowing them 10 – 120 days to remit payment, however, your operational expenses are still due and the slowdown of receiving payment is causing some issues.
- You’ve fallen behind on required tax payments, through no direct fault of your own, and now the IRS or State is requesting a particular lump sum payment amount to be paid within “X” number of days. The only issue, is that you don’t have enough stored savings or capital to remit said payment.
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All of these situations and more can get a small business owner into financial difficulties, even if they’re short-term. There are some good funding resources available, though, that you can turn to in the “crunch” times.
For small businesses with outstanding commercial receivables, a factoring company can come in and buy your outstanding invoices and advance around 80% of the amount back upfront, then once all of your clients pays within 90 days, they will provide the remaining 20% of the amount to you minus a discount fee of 3%.
2. Purchase Order Financing
A funder will work with your suppliers to buy the materials needed for your operations, so you can supply your product to your client base. Once you collect payment from your client, the funding company would be paid a portion of revenues.
3. Credit Cards
Many credit card issuers are offering no interest promos for six to 24 months, in exchange for an upfront “transfer” fee of 1% to 5%. So if you have a credit line on a credit card of $50,000 you could do a $25,000 draw down on a 12-month, no-interest promo, for 3% ($750). As long as you pay off the full balance within the 12 month period, you would not have to pay the regular APR in place.
4. Merchant Cash Advance
A merchant cash advance is a purchase of future credit card receivables using a cost factor between a purchaser and a buyer. A purchaser would note a business doing $100,000 a month in V/MC processing over the previous six months, then offer to buy $120,000 of said processing receivables in exchange for advancing $100,000 tomorrow using a 20% holdback on the daily processing receivables.
5. Short Term Alternative Business Loan
A short term alternative business loan approves about 10% of an organization’s annual gross sales with a six- to 24-month term payback cycle. These loans typically are structured similarly to a traditional loan with an origination fee, disbursement amount, an interest rate, and a fixed term.
Having emergency cash on hand can be your key to managing cash flow.