How to Navigate A Cash Crunch in Your Small Business

Running a small business is not a small feat. You need to be always on your feet to keep up the profitability of the business. More importantly, you need to manage your working capital well to keep the business running. Businesses can face working capital challenges which end up in a cash crunch for a business. There could be multiple reasons for a cash crunch such as:

• Delayed payments
• Unexpected business growth
• Poor planning
• Rising costs
• Unexpected expenses
• Lack of consumer demand

It could be one or a mix of factors that may cause a cash crunch for your small business. A businessman needs to be aware of the current situation and act accordingly. In case your business is facing a cash crunch, it is important to understand the possible routes with which you can navigate this storm.

You have multiple options by which you can handle such a situation. But it is important to be aware of all the options that are available to be able to pick the best one out of the lot. It also depends on your requirements in terms of the amount of money, the period for which it is required, and your ability to repay the debt.

Here Is How You Can Navigate A Cash Crunch In Your Small Business

1. Defer Unnecessary Expenses

One of the best practices, when you are facing a cash crunch in your business, is to defer unnecessary expenses. To do that, you need to understand your buying pattern. If you study your purchases and bank statements carefully over 12 months, you would be able to figure out the gaps that you should fill. You should defer the expenses which are not necessary so that you can save in this tough period.

For instance, if there is a second car that you were planning to buy for more comfort for your family, you can defer it for a while till the time the cash flow situation improves in your business. Also, you can start creating a contingency fund once the situation improves so that you have some savings on the side.

2. Manage Your Receivables And Payables

It is important to manage your payables and receivables efficiently. Imbalance in the two with payables becoming more than receivables is one of the primary reasons why any small business faces a cash crunch. For instance, that big fat payment that you were expecting to roll into the bank last month has not come in yet and it could be the primary reason for your cash crunch.

In a business-to-business ecosystem, buying and selling happen on credit and there are times when you do not get your payments back on time. On the other hand, there are creditors that you have to pay because of your commitments irrespective of the payments getting delayed.

In case you are facing delayed payments, you can explain the situation to your creditors. Some of them may cooperate with you in these tough times and help you sail through the rough waters. Similarly, you can persuade your debtors to pay up fast so that your business can get adequate cash flow so that you can meet your delayed commitments.

3. Track Due Dates of Essential Expenses

In times of need, it is very important to keep the ship afloat. While you are cutting down on your unnecessary expenses always remember that there is no going away from the essential expenses. It is better to make a list of the essential expenses with the due dates.

It will help you get a clear picture of what your monthly commitments are which you have to meet. Also, with clear due dates in your mind, you would be able to manage your available cash better and make the payments closer to the due date rather than making them early.

4. Find Internal Funds

Being in bad times doesn't mean the end of the world. You should always look at internal funds that you can bank on in times of need. For instance, there could be ULIP policies, mutual funds, investment into the stock market, or any other idle funds that could be useful in such times of need.

By using these idle funds, you will be able to buy some time for your business to get back on track again. These internal funds could also prove to be very useful in pumping life into the struggling working capital of the business.

5. Apply For A Loan

One of the easiest and most preferable routes of handling a cash crunch in your business is by opting for a loan. It can be a business loan, personal loan, or any other category of loan that may help your business to come out of the cash crunch. The bottom line is that you will be able to get additional funds by getting a loan for your business. With interest rates running at the lowest level in almost a decade, this could be the right time to opt for a loan in case you are struggling to make ends meet.

A loan could be taken on the guarantee and performance of the business which is known as a business loan. It can also be taken with the help of the personal guarantee of the founders as a personal loan. Depending on the case at hand and your requirements, an optimal decision could be taken in favor of the business.

Since you can get a collateral-free loan in case of a business loan and personal loan, businesses prefer to depend on such instruments as they can be paid in monthly EMIs. Lenders like Poonawalla Fincorp offer a completely online process with minimal documentation and quick approvals which makes the entire process hassle-free and comfortable for the borrower.

6. Bring Partners And Investors On Board

Another route that you can take if you are not sure about taking a loan is to get on additional partners and investors into the business. In this case, you will have to share your ownership of the business to get new partners or investors on board. Also, do remember that they would have a certain amount of control in the business going forward.

On the bright side, they would bring in the required cash with which you will be able to resolve your cash crunch problem and will be able to get back on track. A new partner or investor may also bring in a renewed sense of energy into the business which may prove to be helpful in business growth.

It is important to select a partner carefully and you should find someone who shares the vision, mission, and values of the existing business. It is difficult when a new partner or investor does not understand the current standing of the business, its challenges and tries to reinvent the wheel.

7. Ask Family And Friends

In the earlier days, people used to rely on friends and family during tough times. In case your business is facing a cash crunch, you can always request your friends and family to help you. In simple terms, it is better to ask for help from your friends and family in comparison to taking a loan from a bank or a finance company. However, people usually tend to avoid asking for funds from near and dear ones.

Always remember that the financing that you are going to take from any lender would cost you in terms of interest. In comparison, if you have the option, it is better to ask for funds from your friends and family. It has been seen that due to societal pressure or to maintain social status, people refrain from taking money from relatives and friends. In case you choose to take money from your social circle, always make it a point to pay it back before the date that you have committed.

8. Get A Credit Line

In case you are hesitant about asking your friends and family for a loan, you can always ask your bank to help you in times of need. You can ask your bank to extend a credit line to you. This is one route that is not taken by many because of a lack of awareness. A credit line is similar to a loan but you are expected to pay the loan only on the amount that is used by you as credit.

For instance, if you have taken credit of Rs.1 lakh against a credit line of Rs.10 lakh extended by a bank, you are liable to pay interest on only Rs.1 lakh that you have withdrawn. If you withdraw an additional Rs.1 lakh, you would be paying interest on the outstanding amount at that time. This is a good option for businesses that face a seasonal cash crunch for a short time.

9. Use Credit Cards

Most businesses and businessmen have credit cards these days. You can efficiently use a credit card to manage your cash crunch in the business. As a credit card offers you a credit-free window depending on the card, you can utilize that period to arrange for the funds to make the credit card payment.

You usually get around 14 to 21 days from the date the statement is generated for the credit card. In case you use your credit card on the first day of the billing period, you would get around 45 to 50 days of interest-free money by using your credit card effectively.

It is suggested that you only get into this if you can keep a track of your expenses and the due dates. In case you miss your credit card payments, the interest charged is much more as compared to a personal loan or a business loan. On average, you are charged an interest of 30 to 35% per annum on a credit card as against 10-15% on the other categories of loan. Also, it is not a good idea to use multiple credit cards to revolve credit from one card to another as eventually you would end up in a debt trap and may end up paying much more than what was initially borrowed by you.

10. Monetize Gold

In case you do not find many idle funds that you can bank on, you can always count on the gold that you may have in your family. You can simply monetize your gold holdings to help you in these tough times.

Most families have gold that has been accumulated over generations and the idea of selling gold is not preferred by many traditional families. However, in times when your business is facing a cash crunch, you can count on the assets like gold that have been accumulated over the years to get out of this mess.

You can either sell your holdings or keep them as collateral to opt for a gold loan that can help you get additional funds at a lower rate of interest. You can choose depending on your comfort level and ability to repay the amount.

These are some of the ways which can help you navigate a cash crunch in your small business. In case you are looking at a structured approach and one of the most practical ways to handle this situation, you should opt for a business loan or a personal loan. You can take a loan at an attractive interest rate and can repay it in EMIs to the lender.

For instance, lenders like Poonawalla Fincorp offer you a business loan or a personal loan at a competitive interest rate starting at 9.99% per annum. In addition, you can expect zero hidden charges, no prepayment charges, and best-in-class service. With such a lender by your side, you can count on us on handling your cash crunch with additional funds and you can focus on your business to get the ship sailing once again. File an application for your loan requirements with Poonawalla Fincorp today.

Why is Cash Flow important?

The inflow and outflow of money in any business is known as Cash Flow. It is the amount required to keep your business running with daily operations, operating costs, purchases, and other business activities. The flow of cash is divided into positive cash flow and negative cash flow.

When the amount of cash coming into the account is more than the amount going out, it is a positive cash flow. On the other hand, negative cash flow is when your outflow of cash is more than the inflow of cash.

It is very important to keep your flow of income stable so that you can have a smooth-running business. For example, you can divide your cash flow into different parts

1. Operating Activities: These are the activities that are done regularly.
2. Investment Activities: This encompasses the financial gains or losses from short- and long-term investments.
3. Financial Activities: This pertains to the act of procuring funds through borrowing or equity issuance, as well as the subsequent repayment of the borrowed amount.

FAQs

• What is a cash budget?

A cash budget is the approximate statement of the inflow and outflow of cash over a specific period. It helps in determining how much was spent in the past and the future capital requirement.

• What is a cash float?

Cash float refers to the situation when there is a disparity between the business’ accounts and its bank statements. This can happen when there are technical issues, late payments, money transfers, or checks.

• What is the best way to track cash flow for a small business?

The best way of keeping track of cash flow for a small business is by preparing a cash flow statement.

• How much cash flow is good for a small business?

It is advisable to hold a cash reserve equivalent to 3-6 months of operating expenses for a small business.

• What is the 2% cash flow rule?

The 2% rule states that the monthly rental income should be at least 2% of the property’s purchase price. This rule helps investors assess the potential cash flow and return on investment for a rental property.

Disclaimer

We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Business Loan disbursal is at the sole discretion of Poonawalla Fincorp.
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