More than half of all new businesses close in their first year and making it that far doesn’t make you fail proof.
Small and medium-sized businesses don’t have the deep pockets or backing that large enterprises do, which is why even short-term cash flow problems can sink a business with an otherwise promising future.
Quick takeaways if you’re in a hurry
- SMEs work on tighter budgets than large companies, and that means even small financial problems can sink an unprepared business.
- The most common problems that can sink otherwise good SMEs are: unsustainable growth, clients who pay late and a sudden loss of credit.
- These issues can’t be completely avoided, so every SME requires a plan or prearranged facilities which allow them to manage these kinds of cash flow hurdles when they occur.
How can a business unexpectedly run out of cash?
There are a lot of different reasons why your business could suddenly run into liquidity issues, but let’s take a look at a few of the most common.
Surprisingly, too much success too quickly can wreak havoc on your finances. High demand for your products can overextend your ability to provide services, which means you need to build up your business’ infrastructure - more employees, tools, materials and management support.
If, for example, a long-standing client suddenly wants to scale up their service by an order of magnitude, you might end up trying to scale your operations up part-way (as your budget allows), only to lose the client entirely because the service from your lagging infrastructure no longer meets their expectations. You won’t be able to recover the investment you made in the time you had planned, and your revenue is now even lower than before you made the investment.
Clients who pay late
Every business owner is familiar with clients paying late. It’s so common that entire industries are built collecting those overdue debts. Unfortunately, most SMEs don’t have time to wait for collection agencies to do the work. Businesses need reliable revenue to cover operational costs. When a small business doesn’t get paid, things go downhill fast. Tools break and don’t get repaired, materials run out, payrolls fail and employees leave.
Sudden loss of credit
Sometimes everything will be fine, until you get a letter in the mail letting you know that your bank is closing your line of credit. This essentially pulls the safety net out from under your business. If you were counting on this facility to cover any expenses due to another issue (like a late payment from a client), find another backup quickly.
These issues pose massive risks for SMEs all over the world, and the most critical way to avoid them is by understanding and making use of the financial tools available to SMEs.
What can an SME do avoid cash flow problems?
There are a variety of different financial arrangements that SMEs can make with business finance firms to protect themselves from these common cash flow problems:
Bartercard is a business marketplace where members exchange products and services without the use of cash to attract new customers, boost cash flow and increase profits.
Bartercard has saved Australian SMEs a collective $4.5 billion cash since launching and continues to work effectively in small, localised communities where members exchange everything from a hamburger to real estate, capitalising on spare capacity and slow-moving stock. See what expenses you can instantly move across to Bartercard to conserve cash in these areas. Every member who joins Bartercard receives a $5,000 interest-free line of credit to start spending straight away.
Small business loan
Access to working capital is critical in every business – whether it’s continual cash flow or a vital cash injection to take your business up a notch. This is where Finance Plus can really come to the rescue – we’ve given Australian SMEs access to over $4 million in working cash capital to reach their small business goals. Finance Plus, available to Bartercard members, gives SMEs access to fast and flexible business loans of a $5,000 - $300,000 cash boost and 24 hour funding from the moment of approval. Visit bartercard.com.au/financeplus to enjoy the convenience of working cash capital when required.
This is a line of credit containing flexible payment options letting you withdraw money up to a pre-set limit when required and make deposits when your business receives payments. Many have flexible terms and competitive rates – speak to a business banker to find out more.
The threat of depleted cash flow is a concern for many business owners but having the right resources in place can keep you covered in just a few steps. If you take out a loan always ensure you are credit smart and have a plan around spending and repayment so you can continue to access capital into the future to strategically expand.
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