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Short term loans: are they a solution to business cash flow problems?


This short guide explores whether short term loans are a good strategy to solve business cash flow problems, and the other solutions available.

Problems with business cash flow can lead to a variety of additional difficulties, including official bankruptcy procedures, unless you get assistance from experienced insolvency professionals as soon as possible. You must be honest with yourself and confront the numbers in front of you – it could be a momentary problem that can be quickly addressed, or you may have been in denial, and there are significant underlying problems that would need drastic measures to save the company. When a business starts to have cash flow issues, the greatest concern for directors is being served with a winding-up petition by creditors, which means your firm may be liquidated in a matter of days.

Short term loans: are they the best option?

This is why, when you’re having cash flow problems, you’ll need to act fast. There are a number of different options to help you, including short-term loans. Read on to explore the options.

Short Term Loans

Short-term loans are relatively simple to get, and lenders can deliver money in as little as one business day. However, the annual percentage rate on these loans is greater (APR). On the other hand, the total cost of capital may be less expensive than longer-term possibilities with a lower APR.

That said, a short-term loan could be ideal for a small business if it is facing financial problems, but there is sure to be a change coming. So whether it’s a new contract, an upcoming season that always brings in a lot of money, or a change of tactics that is taking some time to come in, a short-term loan could be a good choice as a temporary measure.

Renegotiate Supplier Contracts

Businesses that are experiencing cash flow issues need a long-term cash flow solution to improve their available cash and ensure that their business can survive. For example, one source of cash flow issues may be how much a company pays its suppliers.

Any rise in gross profit can translate into a significant increase in income. This is not an instant cash flow solution, but company owners see the effect of renegotiated contracts within 30 days. This is why it’s crucial to speak to your suppliers to see if you can change the terms of your contract as soon as possible. A shorter-term loan in the meantime could bridge the gap.

Improve Invoicing

Are you keeping up with your invoicing? The sooner you send out invoices, the sooner you will get paid, and as a result, your cash flow will be improved. Rather than having a product that no one wants to buy or clients who are slow to pay, it could be that the rate at which you invoice people is to blame for your cash flow issues; a regular stream of invoices out means a regular stream of money in.

If your invoicing is frequently slow, it is probably worthwhile to buy dedicated accounting management software such as Billomat. Competent accounting software helps you ensure accurate, timely invoicing while eliminating possible mistakes associated with manual bookkeeping.

Audit Your Finances

If you’re having trouble with cash flow on a regular basis, you should take a close look at your company’s finances. You should do an assessment or audit of all the business’s revenue and outgoings, working with your accountant if required, to identify where savings or improvements could be achieved.

Although this is an important exercise to do, it should be done with caution. If you want to save money, you’ll need to differentiate between necessary ones for the company and those that are not. For example, limiting employee overtime will decrease company expenses, but how will it affect income? Similarly, relocating to a less expensive location may save you money on rent, but would the loss of prestige or footfall harm your business? There may be easy changes you may make to boost your revenue. Adding a supplementary product line or service may seem to be a simple method to increase income, but what extra expenses would this entail?

Create Cash Flow Forecasts

There is no better approach to fix a cash flow issue than to avoid one in the first place. Creating and utilizing cash flow forecasts on a regular basis can tell you how much cash reserve the company will need in the future months. If a seasonal drop in sales or a one-time cash need is anticipated in the coming months, you can take the appropriate measures now, such as arranging a line of credit, to avoid a detrimental effect on your company.

Cash flow predictions are a basic but underutilized accounting technique that can assist business directors in avoiding future problems. However, they must be updated on a regular basis using real data rather than projected figures to improve their accuracy in the future and produce a tool you can depend on.

Prioritize Credit Control

Customer late payments and bad debts (when payments are not made at all) will always be very detrimental to a company’s cash flow situation. In fact, if you depend on a tiny number of clients, a single unpaid invoice may be enough to bankrupt your company. That is why, before agreeing to deal with a potential client, you should thoroughly investigate their creditworthiness. You can take basic measures such as using a third-party credit checking service, investing in credit risk software, and requesting trade references.

You should also formalize the practice of tracking down late payments and maintaining an up-to-date debtor book. Taking measures like charging late fees and providing incentives for early payments may help improve the chance that payments will be paid on time.

Continue To Develop Your Business

Marketing and company growth plays a vital role in ensuring consistent and sustainable cash flow. Many project-based and seasonal companies will be acquainted with the feast and famine cycle. They win a large contract and receive monthly payments for six, twelve, or eighteen months, but they have no immediate stream of revenue coming into the company after the final invoice is paid.

Even at your busiest times, it’s critical to keep up with your marketing and business development activities. This will help to reduce the time you are without a major revenue stream and will help to alleviate any cash flow issues that may arise.

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