By Benjy Feinberg
When running a small business, timing is everything — especially when it comes to your cash flow.
Managing the money that’s going in and out of your business isn’t an exact science. Most likely, you don’t know whether a client will be late on a payment until it’s already happened. And when your payables and receivables don’t match up, it can derail your own payment schedule with vendors.
If you want to pay vendors early or on time, you need to have the cash on hand. But when short-term cash flow gaps have you in financial limbo, this isn’t always plausible.
Often, clients simply haven’t paid for a good or service, or your cash is going toward project fees that won’t get reimbursed until it’s completed. When these situations occur, your business ends up fronting the costs, which drains your cash flow and puts looming bills further out of reach.
Take Control of Your Cash Flow
Failing to pay vendors on time doesn’t just tarnish your reputation with them; it also affects your company’s financial standing.
For one, you could lose out on vendor discounts for early payments and be forced to pay late fees or interest. Or worse, defaulting on payments could hurt your credit score and your ability to get flexible payment terms and lead to skyrocketing loan rates. And when word spreads, it could damage relationships with current and future vendors.
If you’re struggling to pay your vendors on time, you can still turn things around. Here are five ways to manage your payments without breaking the bank:
1. Strategically plan your payment schedule. Are there other vendors you could be paying later to free up your cash flow until then? Work with vendors, and prioritize your payments to minimize lag time.
2. Consider tech-based lending options. These companies combine digital innovation and efficiency with term loans akin to those from banks, offering an easy solution for expanding your working capital. They avoid the hassle and invasive procedures that banks commonly employ by leveraging technology to quickly decide whether to grant a loan. Unfortunately, their interest rates are steeper than banks, but the good news is that their approval rates are higher, too.
3. Take advantage of your credit card. Some credit cards have an additional line of credit attached, so you can borrow cash and pay it back with interest. Most small business credit cards also come with a rewards program. But like all credit cards, defaulting on these payments will only escalate your debt and dig your company and credit score into deeper financial trouble.
4. Look into peer-to-peer lending solutions. When you can’t secure a bank loan, P2P loans are another potential route. You can pitch your credit needs to an online audience of individual lenders and bypass strict bank stipulations for lending. There are almost always lenders out there willing to take on risk because of the potential for a higher return.
It’s important to take caution when engaging on these sites, though. Because these platforms often lack regulation and stability, extra fees and costs can creep in undetected. Your credit can also affect your interest rates on these platforms, so make sure you don’t unintentionally agree to an inflated rate.
5. Use purchase financing or microloans for short-term gaps. Microloan lenders deal with short-term loans in small amounts, so they can get you cash quickly and offer more affordable interest rates. Some give you the money directly while others will actually pay bills directly to suppliers and let you pay them back later. Because you’re borrowing smaller amounts to pay for specific purchases of goods or services, you can avoid borrowing more than you need and paying extra interest on money you might never use.
Most important, don’t be hesitant to negotiate with vendors to find the payment schedule that works for your business needs. While setting up a payment plan, keep in mind the general distinction between on-time and upfront payments – getting more flexible terms isn’t the same as paying late!
When the vendor doesn’t offer you enough flexibility, you can always look for ways to bring your own financing terms by following the above tips. At the end of the day, every business owner just wants to know he has cash coming in to cover the bills. And by having an honest conversation, you can ensure everyone gets paid.
Benjy Feinberg is co-founder and CEO of Behalf. Committed to the power of building relationships between small businesses and vendors, Behalf provides small business purchase financing and works with vendors to increase sales by offering financing options to their small business customer base. Stay connected at @BehalfInc.