Could a small loan for business help you manage cash flow?


In a Nutshell

Maintaining a positive cash flow can be a challenge for many small-business owners. But with a few cash-management tips and access to a small business loan, you could see your business through the lean times.

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Your business might look good on paper, but if you’re not managing cash flow, you might be headed for disaster.

Small-business owners, gig workers and freelancers deal with a host of problems every day. From promoting their products and services to delivering client and customer satisfaction to making sure there’s enough money to cover business expenses, many aspects of running a small business depend on cash.

Cash flow is the lifeblood of any business, but many small-business owners may struggle to manage their cash. Unexpected costs, late-paying clients and failure to plan ahead can all lead to cash flow issues that may make it difficult to pay bills and keep your business afloat. Fortunately, there are steps you can take to better manage cash flow for your small business.

What is cash flow and why is it important?

Cash flow is the amount of cash coming into your business and going out. If your business brings in more cash than you pay out in expenses, salaries, debt payments and other costs of doing business, you have a positive cash flow. If you spend more cash than you bring in, your cash flow is negative.

Negative cash flow can happen from time to time in business. You might be making plenty of sales, but maybe you’re waiting on receivables. You might make a big investment that can pay off in increased revenues in the long run but is causing a cash shortage in the short term. These temporary shortages aren’t necessarily problematic as long as you have a plan to ride them out and they don’t impact your business long-term. But when a business owner deals with cash flow issues month after month, they may have a difficult time paying business expenses or planning for the future.

How to maintain positive cash flow

A 2001 poll by the National Federation of Independent Business found that cash flow was a continuing problem for one in five small-business owners. Even with a great business plan and healthy profits, ignoring cash flow can hurt your small business.

These tips could help you maintain a positive cash flow and keep your business (and bank accounts) healthy.

1. Pay attention to expenses

You may have heard the old adage, “You have to spend money to make money.” While there may be some truth to that, taking the concept too far can spell disaster. Every small business should budget for monthly revenue and expenses. Without a budget — and a serious effort at sticking to it — you could quickly find yourself spending more money than you’re making.

2. Plan long-term

Maintaining a continuous positive cash flow can require long-term planning. Small-business owners may get so consumed by the day-to-day running of the business that they fail to think about cash flow in the future.

If your business relies on revenue from long-term relationships, you may want to plan for new revenue sources for when a contract ends. If your business is seasonal, consider putting away cash during the good months to get you through the lean times.

3. Stay on top of receivables

Slow-paying clients could be a source of cash flow problems for small businesses. When clients regularly take 30 to 60 days or more to pay invoices, you may find yourself short on cash even when revenue is good.

Consider putting procedures in place to deal with receivables, such as setting up an electronic billing system.

4. Have reserves on hand

It can be helpful to have cash reserves on hand to ride out the occasional cash flow crunch. Some finance experts recommend maintaining cash reserves equal to three to six months of business expenses. What you should have in reserves will depend on a number of factors, including the stability of your business and your comfort level.  small-business owners, that may seem like an impossible sum. And in fact, few small-business owners actually achieve that ideal.

A 2016 study from the JP Morgan Chase Institute found that the median small business maintains a cash buffer large enough to cover 27 days of typical cash outflows. And one-quarter of small businesses keep a cash buffer of fewer than 13 days.

Don’t feel like a failure if you can’t afford to stash six months of expenses in your business’s savings account. Just try to do what you can to have enough cash on hand to weather an unforeseen expense or a late-paying client, and try to build up your cash reserves over time.

5. Look at short-term financing

Short-term financing can provide access to funds for emergency purchases or bridging the gap between paying bills and collecting receivables. Here are a couple of options you might consider.

Business line of credit

Similar to a credit card, a line of credit gives you a preset limit to the amount you can borrow. Unlike an installment loan that provides a lump sum and comes with fixed monthly payments, you can use a line of credit as needed and only pay interest on the amount you use.

You can apply for a business line of credit through a number of lenders, including banks, credit unions or look into online financing marketplaces that can match small-business owners with lenders.

Consider applying for a business line of credit before you need it. Establish a line of credit when your cash flow is strong, so it’s available to borrow against in case you need it.

Personal loan

Some small businesses may have trouble qualifying for business lines of credit or term loans. While each lender and small business loan program has its own eligibility requirements, if you are new in business, don’t have collateral and haven’t established business credit, a personal loan may be another option. But note that depending on your business you may not be allowed to mix personal funds with business funds. And we generally don’t recommend using a personal loan in this situation.

With a personal loan, you can qualify based on your personal credit, including your credit history and income, so you may not need to provide the lender a lot of details about your business. You can often get a personal loan for a smaller amount, too, so you may be able borrow just enough to carry you through a temporary cash crunch. But keep in mind that you’re personally responsible for repaying the loan. So if your business doesn’t succeed, you must still repay the loan.

Bottom line

A business that looks profitable on paper may still end up in financial straits if it fails to maintain positive cash flow.

Whether your business is struggling or growing, managing your cash flow effectively can be key to survival. Work on building and keeping a cash reserves, and consider applying for a small business loan or line of credit if you’re struggling with a cash flow crunch.