As a business owner, you’ve probably faced cash flow problems at some point and thought, “I’m having cash flow problems—I should apply for funding and get a loan.”
Prepare for cash shortfalls by preparing a cash flow forecast in this FREE live 1-hour training, which has gotten some really good feedback: https://bit.ly/47PEx4h
Hold on there sparky. ⚡
While a loan might seem quick, it’s rarely the best long-term solution. Instead, it’s important to get to the root of the problem. Before you start filling out loan applications, let’s take a step back and identify what’s causing those cash flow headaches—and explore better ways to solve them.
What’s Causing Your Cash Flow Problems?
Operational Problems:
- Customers paying late.
- Charging too little for your products or services. These problems need fixing inside your business, not outside with a loan.
Timing Problems:
- You’re doing the work, but the payment is late—so the money you’re spending is more than the money you’re getting. In this situation, a loan might only push the problem to later instead of fixing it for good.
Operational issues
Operational issues are problems that happen during the daily running of a business like customers not paying on time or charging too little. These issues can make it hard to cover daily costs.
For these kinds of issues, borrowing more money won’t help. It’s like adding fuel to a broken machine—it just leaks. Fix your operations first, or the extra money will be wasted.
To fix operations, focus on:
- Reevaluating your pricing: if you charge significantly less than what the market is, you’re likely leaving money on the table.
- Tightening your payment terms: late payments are a cash flow killer. Consider offering early payment incentives or introducing late fees to encourage quicker payments. Automating your invoicing process also helps speed things up.
Timing problems? Consider purchase order funding
If your issue is more about timing—meaning you’re waiting on payments after completing work—there are smarter ways to bridge the gap than taking out a loan.
One solution is purchase order funding, which helps cover the costs of fulfilling orders while you wait for payment. It smooths out your cash flow while you wait for customers to pay.
Revolving credit facilities: a backup for timing gaps
If you need a short-term solution, a revolving credit facility is a better option than traditional loans. With this, you only get charged when you use it. However, this should be a temporary fix, not your go-to strategy for managing cash flow. If you are always dipping into the pot, you need to work on the operational issues as mentioned before.
Why loans aren’t the long-term solution
Here’s why you shouldn’t rely on loans to solve cash flow problems:
- Debt adds pressure: loans come with interest, which adds another layer of financial strain.
- It’s a temporary fix: without addressing operational issues, cash flow problems will keep returning.
The best way to find the real cause of your cash flow problems is by creating a cash flow forecast. It doesn’t just help you plan—it helps you see where the problems are, like late payments, underpricing, or timing issues.
By forecasting, you can spot exactly where the gaps are. Then, you can take steps to fix the problem, whether it’s adjusting prices, tightening payment terms, or managing the timing of your income and expenses better.
Next week on the 22nd of October, I am hosting a free webinar where I’ll teach you how to create a cash flow forecast that works for your business. You’ll learn how to identify cash flow problems before they happen and put strategies in place to manage them effectively.
Sign up here: https://bit.ly/47PEx4h
And as always: 👇🏽
Disclaimer
This article is not financial advice. It’s for informational purposes only. Tax laws and rules are complicated and can change. Always talk to your accountant or a qualified financial advisor before making any financial decisions. The examples given are just for illustration and may not fit your specific situation. Getting professional advice tailored to your own circumstances is important for following the rules and planning well.
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Until next time,
Praneeta
