Adequate cash flow is essential to the smooth running of any business, but many struggle to maintain consistency in this area, for a variety of reasons. Fortunately, financial products exist that can help; but how can you best put them to use? Let’s take a look:
Why is Cash Flow So Important?
Cash flow – or the basic movement of money – is a fundamental aspect of any business. Without enough incoming cash, a business won’t be able to pay its bills and employees, purchase inventory, or maintain basic operations. Intermittent or unreliable cash flow can also endanger wider business objectives, such as growth, by impeding a business’s ability to invest.
Unfortunately cash flow issues, even one-off ones, can pose a risk to a business’s very survival; delayed payments on bills can affect a business’s credit, which will make it harder and more expensive to secure financial help in the future; delayed payments to suppliers can negatively impact relationships and potentially limit access to inventory or resources; and delayed payments to employees may lead to talent loss. Moreover, interrupted operations will affect customer retention and business reputation, threatening market share. All of this is clearly very bad news for business owners, but not all threats to cash flow are avoidable.
What Can Threaten Cash Flow and Stability?
While it may seem obvious that a business needs enough money to cover its costs, it’s worth remembering that many everyday factors outside of a business owner’s control can impair cash flow; these include:
- Delayed customer payments or long-outstanding invoices
- Inconsistent sales (especially prevalent in seasonal businesses)
- Unexpected expenses, such as emergency repairs
- Fluctuating energy prices
- Changes in interest rates
- Unstable market conditions (for example, due to wider economic uncertainty)
- Supply chain delays
- Changing regulatory and tax landscape
So how can a business safeguard itself from these risks?
Business Financing Options for Cash Flow and Stability
Appropriate business financing can help a business protect itself against all manner of cash flow threats, including those mentioned above. But not all types of financing will work for this purpose; for example, a traditional business loan, or anything structured like one, requires reliable cash flow to make set, regular loan repayments. So you need financing to compensate for unreliable cash flow, but you need reliable cash flow to pay for the financing!
For this reason, alternative forms of business financing are better suited to assist with cash flow; these include merchant cash advances, invoice factoring loans, and revolving credit facilities. All three allow for flexible borrowing that can adapt to your business’s changing needs. Merchant cash advances in particular suit businesses with inconsistent cash flow, as the advanced funds are repaid as a percentage of credit card sales; so if a business is in a period of low cash flow, repayments slow to match.
Ways to Use Business Financing to Improve Cash Flow and Stability
Making best use of business financing is an important corollary to finding the best business financing. There are a few ways funds can be best put to work:
- Pay all bills and suppliers on time. This will not only prevent harm to your business, but will also build goodwill and a positive credit score for the future.
- Negotiate better terms with your suppliers; for example, some offer discounts to those who pay their bills early. Using loan funds to pay for inventory and supplies, at a discount, and then recouping the money from future sales is a smart way to flip the standard cash flow script – if you have the funds on hand to do it.
- Similarly, you can offer discounts to your customers for paying early, and use loan funds to make up the difference. This won’t work as a long-term strategy, but in the short-term it will help you to get out of a negative cash flow loop caused by inconsistent customer payments.
- Invest in improvements to your payment, invoicing, inventory management, and delivery procedures to minimise inefficiencies and reduce unnecessary wastage. Such improvements need capital to affect, but once undertaken will permanently improve your cash flow.
- Invest in a marketing campaign to attract more customers, and thereby increase your cash flow in the future.
- Expand your products or services to diversify your revenue streams; this will help you reach more customers, potentially in new markets, and thus improve your cash flow, while protecting it from any single point of failure.
- Get expert advice to identify and mitigate potential cash flow risks, so you can be better protected in the future and avoid unexpected issues.
- If you have customers (new or existing) that account for significant portions of your revenue, you might want to consider investing in customer credit checks. This can help you to identify potentially troublesome relationships before they hit your bottom line.
- Invest the time and finances needed to thoroughly analyse and understand your current outgoings; a startling proportion of businesses can improve their cash flow simply by reducing unnecessary costs, but many lack the bandwidth to do so. Loan funds can provide the breathing room you need to reduce overheads on an ongoing basis.
If you’d like to learn more about merchant cash advances and how they can help your business weather difficult times, without stressing your credit or your budget, connect with Swiftfund. And find more invaluable advice for business owners on our blog.