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How to Avoid Cash Flow Problems as a Small Business

If you own a small business, then you’re probably no stranger to cash flow issues. In fact, 21% of businesses claim that cash flow problems were significant issues, potentially leading to closing down.

One of the best ways business owners can ensure success is by carefully managing cash flow. Because no matter how great your business plan is, your business won’t survive if you run out of money.

What Causes Cash Flow Problems?

Before you can get a handle of your cash flow issues, you have to understand why they occur. Here are three common reasons why cash flow problems may arise:

  • Unnecessary Spending

Many business owners have head the old adage that you have to spend money to make money. Unfortunately, this belief has caused many ambitious business owners to overspend. Not all business expenses equally as important to your operations. Consider the cost-benefit of each expense.

  • Overestimating Future Earnings

Optimism is a great trait but it needs to be paired with a healthy dose of objectivity. It’s important to forecast your sales based on previous earnings and data. By not counting on future earnings that may never show up, you can prevent overspending.

  • Inconsistent Sales

Some businesses have occasional spikes in sales followed by months where they sell next to nothing. Trends like these cause problems with budgeting and makes it difficult for business owners to make operational decisions, often choosing to survive off of their “good” months.

Cash Flow Problems for Small Businesses

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Tips for Avoiding Cash Flow Problems

Cash flow problems are a reality for nearly all business owners but there are ways to manage them. Here are five ways to mitigate your cash flow issues:

1) Take Out a Short-Term or P2P Business Loan

A short-term business loan can provide the capital you need to run your business and pay for any expense, from inventory to office furniture. Short-term business loans have a high rate of approval even for businesses with limited credit history.

You’ll receive the money faster than you would if you took out a traditional bank loan, which can be extremely helpful if you have immediate needs. Sometimes the application process can take as little as 24 hours. One of the first places to check for business loans as a business owner would be Small Business Administration.

Or, if you prefer to bypass the government, you can try a peer-to-peer business loan. These loans are funded by individual investors through a lending platform. However, these loans usually require more frequent payments, and you will likely end up with a higher interest rate.

2) Use a Working Capital Loan

Working capital loans can give you the cash flow to cover crucial operational costs like rent and payroll. This gives you the flexibility to invest in your company’s growth and still cover day-to-day expenses.

Unlike other business loans, working capital loans don’t require that you state your reasons for taking out the loan. However, you will have to repay this loan quickly and your loan may have a high interest rate.

3) Rely on a Traditional Small Business Loan

There are benefits to an alternative lender, but a traditional small business loan has advantages as well. A small business loan can give you access to the funds you need to keep the lights on while you invest in your business growth.

Traditional banks can offer one-on-one customer support, and they often have a greater variety of options to choose from. Your interest rate will be lower and your repayment terms will likely be more flexible.

However, it can be difficult to qualify for a traditional business loan, and the application process can be tedious. And you’ll have to offer some type of collateral or a down payment.


The Top Challenges for Small Business Owners

The Top Challenges for Small Business Owners

4) Consider Invoice Factoring

It can be frustrating when your clients delay paying their invoices. And when the majority of your customers are slow to pay, your business can face serious cash flow issues.

This is where invoice factoring can come in handy. Invoice factoring is a form of financing that converts your unpaid invoices to cash by selling your accounts receivable to a third-party factoring company.

With this method of accessing fast cash, you’ll typically only earn between 70% to 90% of the total value of what your customers owe to you. The benefit is that you have immediate access to cash without the burden of taking on debt.

However, in addition to the loss of value on your invoices, the fees from these third-parties can be high. Keep in mind, you would be turning over complete control of your invoices to another company, so you need to be sure that company is trustworthy.

5) Rely on a Merchant Cash Advance

A merchant cash advance is another way to get quick access to cash. This alternative financing gives you cash in exchange for a percentage of your future sales.

Many businesses like that they can get access to cash quickly and with minimal paperwork. And since a merchant cash advance is unsecured, you won’t have to put up any collateral. However, the APR on this financing could be significantly high – ranging from 40% to 350% depending on your lender.

The Bottom Line

Many businesses face cash flow problems, but a range of financing options, from small business loans to merchant cash advances, can help them survive through difficult times. Carefully consider your business needs as well as the pros and cons of each so that you can focus on growing your profits as you keep operations flowing smoothly.


By Andrew from LendEDU – a consumer education marketplace and small business startup. He’s been working in a small business environment for several years and has gained plenty of knowledge from writing about various financial topics along the way.

Related Posts:

1. Unsecured and Secured Short Term Sources

2. Short Term Financing

3. Advantages of Long Term Financing