How to Up Your Small Business's Cash Flow -- Fast
Of the many challenges that small businesses face, the vast majority cite cash flow as one of the biggest roadblocks to running a successful and growing enterprise. About 60 percent of them fail for this reason alone.
The flow of capital in and out of a business is an inevitable part of operating, but there are ways to prepare for working capital gaps. Here, the most common root causes of such cash-flow gaps and tips to remedy the situations.
The biggest problems
Small businesses often don't know when a customer will pay, and pinpointing the influx of capital is nearly impossible
Days Sales Outstanding is the measure used to calculate the number of days a company waits to collect payment from accounts receivable. A study released by Experian showed that large companies were paying invoices an average of about eight days overdue, a 14.1 percent increase from the previous year
Small businesses are often at the mercy of larger companies and therefore have less negotiation power when it comes to terms of payment
And what to do about them
Accessing outstanding invoice amounts with programs like Fundbox: There are product applications such as Fundbox that link directly to accounting software enabling small business owners to instantly advance the full amount of an invoice and avoid the challenges with longer payment terms. Programs like this bridge the gap between accounts receivable and accounts payable. They also alleviate the stress and uncertainty of not being able to predict when an invoice will be paid
Merchant cash advance like Square Capital, CAN or Rapid Capital Funding: A structured lump-sum payment to a business in exchange for an agreed-upon fee or a percentage of future credit or debit card sales. This option is best when a small business is in need of a large amount of money immediately and has substantial credit card transaction volume through its POS terminal
Alternative lenders like OnDeck: OnDeck is a platform that provides immediate, direct loans to small businesses. With alternative lenders such as this, the average loan is around $35,000 which is most helpful for purchasing equipment, hiring additional employees or beginning a marketing campaign
Invoicing products like Freshbooks: Freshbooks is an e-invoicing and billing software for owners of small businesses that send invoices to clients and get paid for their service or products. Freshbooks assists small businesses in keeping their invoices organized, as well as tracking time and additional expenses
Set up Automated Clearing House payments using sites like Bill.com: Bill.com facilitates electronic payments made through the Automated Clearing House network, a secure system for clearing electronic payments between banks. Bill.com simplifies how businesses pay and collect their bills
PayPal: It's not only an alternative payment solution, but also a credit provider to merchants that have online businesses
According to the Small Business Administration, more than 23 million small businesses in the U.S. account for more than 54 percent of the sales of goods and services. Despite small business being the engine that fuels the U.S. economy, a restrictive financial environment makes it difficult to secure working capital as small business lending is not profitable for large banks.
Taking the above into consideration and knowing that cash flow is the lifeblood of a strong operation, understanding the available options is critical. These solutions are good examples of the tools small business owners have at their disposal to get through cash flow gaps and access capital to invest in growing their businesses.
Eyal Shinar is CEO and founder of Fundbox. Prior to his current role he served as a vice president at Battery Ventures where he led many projects and investments in the areas of finance, machine learning and software as a service. Additionally, Shinar was one of the first employees of Old Lane, a $5.5 billion New York-based global hedge fund (later acquired by Citigroup), and also worked for Castle Harlan, a leading $6 billion NYC-based buyout firm. Shinar earned his MBA from The Wharton School of Business at the University of Pennsylvania.