Running a small business is not always an easy task, especially when your cash flow is not as positive as you would like. Did you know that 25% of all small businesses fail from poor cash flow? If your small business has cash flow problems, here are three important things to know.
1. What Are the Risks and Dangers of Poor Cash Flow?
Cash flow is a term used widely in businesses, and it refers to the money your business has coming in and going out. When a business has more money coming in than going out, the business has positive cash flow. When the business has more money going out than coming in, the business has negative cash flow.
Negative, or poor, cash flow is highly risky for a business. Every business needs cash on hand, and they need plenty of it. Businesses need cash to pay for utilities, rent, payroll and inventory. A lot of businesses also need it to pay for raw materials used for manufacturing goods. Your business needs cash coming in to survive. Without it, even the best business can be destroyed.
While you might not experience problems right away from poor cash flow, it will catch up to you. You might reach a point when you cannot pay your employees their paychecks or when you cannot buy any more inventory or raw materials until you pay your past-due balances to your vendors.
Trying to survive with poor cash flow will last only a short while before problems begin arising with your business. Poor cash flow often leads to increased interest payments and late fees to creditors. It can also prevent your company from growing and can lead to your business missing great opportunities to stock up on inventory when prices fall.
2. Why Do Companies Often Experience Periods of Poor Cash Flow?
While every company has differences in the causes of their poor cash flow, here are some of the common reasons this problem occurs often in small businesses:
- People start small businesses with too little cash on hand
- Companies have slow periods in sales
- Small business owners invest in new equipment, materials or machines
There are a lot of other things that can also cause poor cash flow, but it is definitely a problem you should take seriously.
3. How Does Taking a Business Loan Help?
Finding a way to prevent poor cash flow problems from destroying your business is vital if you want your business to succeed and grow, and one of the best methods available for this is through a small business loan.
When you take out a business loan, you can receive cash to use for operating your business. If you get approved for the loan, you can deposit the proceeds into your business checking account. This cash on hand will allow you to have the money you need to keep your business afloat during periods when your cash flow drops.
You will incur interest on the loan you take, but paying a small amount of interest is typically highly worthwhile if it prevents your business from crashing to the ground.
One thing you should realize is that you might encounter hurdles when applying for a small business loan. There are a variety of common challenges small business owners face with this, but you should not let this stop you from pursuing a loan.
If your small business has a lot of potential but needs a little boost with cash flow, contact Financial Consulting, Inc. to learn more about the options available in loans for small business owners. We help business owners find loans, and we can help you protect your business from the risks of poor cash flow.