Financing options for improved cash flow
Here's how credit can help you smooth over a cash flow shortage.
At some point in its lifecycle, almost every business will have to face cash flow issues. If your business makes a lot of seasonal sales, for instance, it can be difficult to bridge the gap until the next busy period, and you may face a temporary shortfall in cash. Or maybe you're counting on a couple of big customers for inflow, but their payments are coming more slowly than expected.
Here's how credit may help you during cash-strapped times you might experience.
Line of credit: Use as needed
Lines of credit are useful because the monthly payment you make and the interest that accrues are directly correlated to the amount of credit you actually use — so if you end up not needing to draw from the line of credit, you won't pay any interest. Apply for a line of credit as soon as you forecast a cash flow issue down the road, and if approved, you can tap into it whenever necessary to ensure you maintain on-time vendor and employee payments.
Short-term loan for short notices
Sometimes, your cash flow deficiency may come on shorter notice: Maybe you had to make an unexpected repair that ate up most of this month's income. In that case, you may consider turning to a short-term loan to help pay supplier bills or taxes until you get that next influx of cash. And if you expect to rebound from your cash flow shortage relatively quickly, you can generally pay the loan back within a few months and won't be committed to making payments forever.
Factoring for instant cash
Also known as "accounts receivable financing," factoring is when a business uses its existing accounts receivables as collateral for a loan. This system can enable you to have a stable cash reserve without having to worry about when you receive customer payment — and this can be beneficial if your customers are creditworthy, but slow to pay. Many small business owners turn to factoring as a useful short-term solution because it works extremely quickly — once you and the lender agree on the value of your receivables, you can receive the cash within one to two days. And since the value of this line is tied to your sales, it can grow along with your business.
Business credit cards for everyday expenses
With a credit card, you have the flexibility to use as much or as little as you need up to your credit limit. Credit cards tend to be most appropriate for your business's day-to-day expenses. Just make sure to check your credit cards' interest rates so that you're aware of the true costs and as always, compare credit cards to find the best rewards program for your business.