Cash Flow Problems? Is a Short-Term Loan Right for Your B2B Company? What Are the Alternatives?
Many businesses have short-term or seasonal cash flow issues that dip into operating capital. While setting money aside for a rainy day is possible for some businesses, many don’t have that luxury. For them, a short-term loan is an attractive option.
For instance, small B2B companies can develop cash flow problems when all payments come in at once, say the beginning of the month. If you’re running a fledgling SaaS company and all your clients pay on the first, you could be struggling by mid- or late-month. The opposite is true when clients habitually pay late, creating cash flow issues at the start of the month. This problem is compounded if you have annual subscriptions and an imbalance of monthly renewals throughout the year.
If your business struggles with these problems, should you look into financing options? Before you start filling out the paperwork, let’s take a look at the pros and cons of short-term loans and some funding or proactive alternatives that might make sense.
Pros and Cons of a Short-Term Loan
A short-term traditional loan is the most obvious answer for a business having cash flow problems; however, it’s not always the best answer. Here are some pros and cons of short-term loans for B2B companies:
Pros of short-term loans:
- Can actually have a lower interest rate (specifically a factor rate) than longer term loans, especially in a down economy (when you’re most likely to need one)
- You get the money quickly, and can pay it back as soon as your immediate cash flow issue is resolved
- Many lenders care more about your income than your credit score
- To qualify, your business only needs to be operational for 3 months (though some lenders require a longer history)
Cons of short-term loans:
- Many short-term loans are charged by the factor rate, not the APR, which tends to be more expensive
- You need an excellent credit history or proof that your startup has excellent income potential
- Payments can be expected weekly or even daily
- Many loan requests are not approved
- Alternative lenders may give you a loan even with crummy credit, but you will pay for the privilege
If you can get a short-term loan and know you can pay it off, they are not a bad idea. You do need to be careful; there are many sharks in this pool, and businesses get into trouble with predatory short-term loans almost as often as desperate individuals.
For young SaaS companies and other subscription-based services, short-term loans might not be an option as the worst cash flow problems tend to crop up in the early days of the business, before you have the income history and credit score needed to apply with a reputable lender. If this describes your situation, you might want to consider alternatives.
Incentivize Your Customers to Pay Faster
If your cash flow issues are caused by people paying their subscriptions late, then you can encourage customers to pay on time or even early. A good strategy might be to offer a discount on the invoice if the customer pays early. This can help spread payments out a little.
You should also follow up with customers who consistently pay late. One option in this case is to change somebody’s payment date to the middle of the month to solve their cash flow issues as well as your own.
If you sell annual and quarterly subscriptions, you could try offering a better rate for several months as an incentive to spread your customers out better through the year.
Some businesses resort to invoice factoring, where you sell your unpaid invoices to a factoring company in exchange for a lump sum of cash. This is only a good option if you have some seriously delinquent customers and you can’t track them down.
Additionally, make sure you can accept online payments and encourage your clients to move to auto-billing so they can’t forget to pay. Auto-billing generally means direct payments (a service we can provide).
Use a Line of Credit
A line of credit can help when cash flow is slow. This works more or less like a credit card – you have a limit that you can borrow from at any time and then pay back. Be careful though, since you pay interest on what you borrow. Interest rates tend to be high, but generally lower than consumer credit cards.
Of course, you can also just use your personal credit card, especially if you have a card with rewards. They are definitely a useful thing to have around, but are only recommended for extreme cash flow situations.
Get a Microloan
If the amount of money you need is small (35k or less), microloans can be a good option. They are often offered by non-profits, making them much more affordable, and you don’t need a pristine credit score to get approved.
Microloans are particularly easy to get if your company is owned by a woman, a minority, or a veteran. Banks generally don’t like to lend such small amounts of money to businesses, so look online for products offered in your area.
Offer to Pay Your Suppliers Early for a Discount
If getting early payment from your customers helps you, rest assured your vendors feel the same way. By offering to pay early in exchange for a discount, you reduce your costs and also get a bit more control over when you pay a bill. This of course doesn’t produce a revenue stream, but it is an effective proactive measure to help counter cash flow problems, should they occur.
Keep in friendly, regular contact with all of your vendors and suppliers. That way, whether you’re trying to balance your inflow of cash or if you do need to pay late for a different reason, they’re more likely to be understanding.
Last, but not least, having a proper system to send out your invoices is essential. Make sure that your invoices have the date on which payment is due in multiple places. Also include clear instructions on how to pay, and prominently display late payment fees if you charge them.
Electronic invoices tend to be clearer and easier to read than paper (and also save you the cost of the paper and a few trees). They are also less likely to be lost.
Dealing with your cash flow issues, especially when you are dependent on subscriptions, can be a challenge. You might be in a position to take out a short-term loan, but I wanted to lay out some other methods for managing cash flow during those times when it slows to a trickle.
Direct Payment Group can help you with invoicing and managing cash flow. Reach out today to find out how we can help.