What Should You Do If Your Business Is Running Low on Money?

by Scott K. Schmidt, Chief Financial Officer at U.S. Money Reserve

You have a few options should your cash flow become tight. Here’s what you need to know.

Running a business is hard and complicated. It requires a considerable amount of time, effort, and — well — money. Sometimes that money can get tight. Economic uncertainties, a change in the business climate, a loss of a major client, even a worldwide pandemic can derail the best-laid business plans. Never fear, though; even when things seem tough, you have a few options for ways to handle a financial drought. Here are the two main steps you should take if your business is running low on money.

Cut Your Expenses

The first step you should take to protect your business and your employees is to start cutting back on expenses. To do this, you need to take a good hard look at your P&L (profit and loss) statement and figure out how long of a runway you might have before you have to consider closing up shop. Take a good, hard look at your monthly or even weekly budget and see where you might be able to trim some of the fat. Perhaps there’s a series of subscriptions you can eliminate, or maybe there’s a function you can do in house rather than outsourcing. Look to cut back or eliminate any recurring costs that you can. It truly depends on what your business is and what you do, but if you look closely enough, there are bound to be things you might be able to cut.

Figure Out How Deeply You Need to Cut

How deeply you decide to cut is up to you, but if you look at your books and discover that you have less than three months of a pre-shutdown runway, it’s time to look at making some deep cuts. A good rule of thumb when it comes to cutting expenses is to aim to cut at least 25% of your expenses. While that seems like a deep cut, it can mean the difference between having to let your business go and having it survive.

Negotiate with Your Landlord

If you’re having trouble paying rent, reach out to your landlord. The one mistake most business owners make (the same goes for individuals) is that they don’t ask for help from the people who can make a difference when they need it. You never know if your landlord may allow you to put off paying your rent for a few months or might be willing to cut you a few months of a deal while you get back on your feet. The same goes for any creditors or other vendors you might owe. You’d be surprised at how willing companies and individuals are to cut you some slack and help you out in a time of need.

In this case, it’s best to reach out to your landlord before you get behind on rent. No one likes to be surprised when money is suddenly not coming in, and keeping mum while you sink is a bad idea since it hurts any relationship you might have with the landlord and can impact any future dealings you may have with them. If you reach out early and offer transparency, the landlord is more likely to be willing to flex with you on the rent.

Find New, More Affordable Vendors and Negotiate

While it may not seem like the ideal time to start looking for new partners and vendors, there’s no better time to revamp your deals than when you are strapped for cash. Head to the market to find new, more affordable vendors to work with, and you could be surprised by the savings. Often, vendors will cut you a deal when they know you are shopping around, which can help you in the long run.

Be sure to leverage one cost estimate against another, too. If Vendor A says that they will sell you goods at $30 per piece, while Vendor B says they will sell to you at $25 per piece, go back to Vendor A and see if they will beat Vendor B’s price. In some cases, you may need to show up with a written estimate, but more often than not, most outside vendors will want your business and are often willing to negotiate with you.

Consider Staffing Cuts

If things do get dire, you need to consider cutting staff. While that’s never an option anyone likes to consider, it is one way to get your expenses down fast. The rule for making staffing cuts is that you generally want to start with the least vital folks first. It’s never pleasant for anyone, but in today’s harsh business environment, staff cuts may be a reality.

Find the Money

When things get tough, you may find that you are falling behind on taking in cash from your customers. More often than not, it’s probably highly likely that the rest of the industry or business sector you’re working in is seeing a contraction or downturn, too. Don’t worry — you aren’t alone. Getting paid later than you should is a problem that all small businesses face. Here’s how to tackle it.

Renegotiate Your Invoice Terms

If you typically allow customers 90 days to pay but you start to fall on tight times, you need to reach out to those customers and see if you can renegotiate to get those invoices paid sooner. Even if you go from 90 days to 60 days, it can mean a world of difference for your bottom line. It can also mean the difference between retaining staff and having to lay people off.

One way to get customers to pay you sooner is to offer a small discount for earlier payment. It helps get you paid sooner, and it can help out other struggling small businesses, like your vendors, who may be trying to make ends meet, too.

Get an SBA Loan

There are plenty of options for financing your small business out there, but it takes time to weed through them. One of the best places to start is the Small Business Association (SBA). In general, the SBA does not offer loans (though that has changed some in these days of COVID-19 since they now provide the Economic Injury Disaster Loan, or EIDL, directly), but they do back loans offered by other banks. SBA loans are generally better than any other loans on the market because they offer favorable terms and a clear repayment structure. They also tend to be more financially beneficial to the borrower than other options. In general, most SBA-backed loans require collateral.

The SBA also backs loans that do not require collateral. These are known as micro-loans. These are offered through smaller nonprofit banks and go up to $50,000. Whichever SBA loan option you choose to go for, it’s essential to know that SBA-backed loans generally take longer to get since there are more rigorous processes and standards to meet to qualify.

Consider Invoice Factoring or Financing

While invoice factoring and financing aren’t ideal, they can help you alleviate some of the financial burdens you face when your business runs low on cash.

Factoring allows you to sell your customer invoice to a factoring company that then advances you a portion of the invoice and sends you the rest once the customer has paid, minus fees. In general, factoring companies will advance you around 80% of the invoice, and fees run anywhere from 1 to 5%. Factoring isn’t a fantastic option because it can become costly very quickly.

Invoice financing usually takes a bit more time to secure and works similarly to any other loan. The collateral, however, is your invoices. You then collect the invoices yourself and pay the lender back.

A word of caution here — these tools can be helpful when you are facing a cash shortage, but there are many pitfalls to watch out for, including hidden fees, unscrupulous lenders, and factoring companies that abuse your valued customer relationships. Do your homework before pursuing either one of these options so you know what you are getting into before signing on the dotted line.

Consider PO Financing or Supplier Financing

PO financing is a very small area of financing that only serves those who sell goods (like resellers or wholesalers). Essentially it provides you (the seller) with enough financing to meet the needs of a PO (purchase order) placed with your company. When you’re ready to ship the order, the lender collects payment straight from the customer. They then subtract their fees and send you the remaining cash.

Supplier financing is used when you need to buy more goods than you can currently afford from your suppliers to fulfill orders. You order through the supplier finance company, which then extends you the credit needed to make that purchase. The loan company pays the supplier directly and takes out a fee by marking up the goods that you bought from the supplier (usually 2 to 3%). Terms for payback can range up to 120 days.

Both of these are rather specific and complex and should only be used if needed. Like always, read everything you sign and consider these kinds of loans carefully.

Sell Excess Inventory or Unnecessary Equipment

You can generate some income by selling excess inventory or unnecessary equipment, too. There are plenty of online marketplaces for used equipment, and you can quickly get the cash flow going again if you sell a large or specialized piece of equipment. Just remember — if you sell a piece of equipment, you can’t then use it for loan collateral.

Ask Friends or Family for Help

Asking friends and family for help is one way to get a quick cash infusion when you are strapped. But remember, if the economy as a whole is down, they aren’t likely to be exceedingly willing to part with cash. If you decide to borrow from friends or family, be sure that you get a formal agreement in place with detailed repayment terms. No one wants to be left with a soured relationship over an infusion of cash.

Get a Personal Loan or Other Quick Cash

Alternatively, if an SBA loan doesn’t work for you, you can also apply for personal loans or other loans through your bank of choice. Some options include borrowing from your 401(k), taking out a HELOC on your home, or opening a credit line. A word of caution, however: All of these come with potential pitfalls (penalties, taxes, etc.), so before you sign up for any of these options, know what you are getting into and read the fine print thoroughly. Also, if you’re going to leverage your home, your 401(k), or your personal credit, be sure you talk to your spouse or partner first. These kinds of financial decisions should never be made in a vacuum.

Use Your Credit Cards

While credit cards are also not ideal for financing, they can provide a quick cash infusion if you need it — and that money can be accessed without having to put up collateral. Be warned though: Taking out considerable amounts on your credit card(s) will hurt your personal credit score and your business credit score, which will impact your ability to get financing down the road. Also, be aware that credit cards carry insanely high interest rates (some as high as 20%) and penalties if you are late on a payment or miss one altogether.

As the business world evolves and changes, and you are increasingly forced to grapple with sometimes large fluctuations in cash flow, it pays to know your options. Choose the right tools wisely, and you may just make it through the lean times unscathed.