The Small Business Administration declared this week the National Small Business Week for 2020, and it’s been quite a year to handle for small business owners. Since the national emergency was issued in March, private employment dropped more than 15%, and the majority of those losses were in the small business sector. Some sectors have been hit harder than others, but overall, cash flow is hurting.
Small Business Planning
Small business owners are not out of the woods when it comes to protecting their business during this recession. When businesses had to shut down, it came as a shock to the nation. The difference now is that business owners know the challenges they face and can prepare accordingly. It is crucial that businesses prepare for a long term decrease in revenue. There isn’t a miracle vaccine that will restore things to normal overnight. Having cash reserve and a lean business can help you weather this recession and keep your business strong. Short-term planning is only a bandage for your problems. Think longer-term about how to have enough capital to continue operating.
Small Business Pain Points
At the end of the day, your business health comes down to your cash on hand. Every business has a different sales cycle and cash flow needs. Some companies need cash upfront to cover supplies and labor until their customer pays on credit terms. Other businesses get paid immediately for their goods or services, but still need to cover the supplies and labor until they make the sale. Typically, B2B transactions are on credit terms. This means that cash flow is crucial to staying competitive and healthy. If your customer has to wait to be paid by their customer, then they may extend their payment terms with your business to accommodate. This will hurt your flexibility and business health because of insufficient working capital to cover your overhead and production costs. Larger companies take advantage of this system by extending their payment terms with their suppliers. This disproportionately affects small businesses who are unable to do the same.
How to Stay in Business
In order to support your business and improve your cash flow, you may need small business financing. There are a couple options available. A small business loan from a bank will offer low rates right now, but credit worthiness may hold you back from obtaining one. Even if you are approved, you may be denied the full financing amount that you are seeking. Additionally, banks are less likely to lend to small businesses during recessions due to their perceived risk level. An online loan may be easier to obtain than a bank loan, but again you will run into credit issues, time in business issues, and financing deficiencies. Online loans will also typically be more expensive than bank loans, but they are faster for approvals. Merchant Cash Advances are short-term financing solutions. These come with expensive repayments at a daily or weekly basis that will typically hemorrhage your cash flow and lead you to taking out another MCA just to make repayments on your first MCA. This can be a slippery slope to getting trapped in a debt cycle, so triple check that an MCA makes sense for your cash flow needs before taking one.
Invoice factoring is an alternative financing solution to a bank that will improve your cash flow, debt-free, and does not require a high credit score. This will be less expensive than an MCA and some online loans, and approvals are quick. Factoring works really well for small businesses during recessions or sudden changes in business because it eliminates the waiting period between making a sale and collecting the invoice amount. Instead, businesses factoring their receivables have immediate cash on hand to meet payment obligations or to continue making more sales.