How small businesses can solve their cash flow problems

small business

A sizeable number of small businesses will be in the red for around one to three years from when they open their doors. That means those first three years are the most critical years for any new business, with around 33% of all small businesses not surviving the first two years, according to a recent Small Business Administration report.

That is why partnering with financial solutions companies, like the American corporation Fundera or the Australian firm Beyond Merchant Capital, are a beneficial, and often essential, step for not only surviving the first few years, but for making your business thrive in the following years.

Running the numbers

There is one main reason why a small business goes south, and that is bad cash flow planning. A U.S. Bank study by Jessie Hagan cited that 82% of small businesses fail due to poor understanding and management of cash flow. It is distressing to note that the main cause of their problems could have been easily solved with help.

However, whilst there are myriads of companies that are willing to finance a new business’ cash flow needs, some of the products available actually hurt more than they help, and will benefit the lender only to the detriment of the borrower.

To say that cash flow is king is an understatement, and problems with operating cash flow for even established small businesses inevitably lead those businesses closing their doors. Therefore finding a supporting institutional partner that focuses on small business finance will give you a big starting advantage.

Solving your cash flow concerns

Cash flow can literally make or break a business. One of the important factors to be aware of is that the payment method of your business loan is as important as the amount of the loan, and arguably even more critical.

Most financial companies tend to use the conventional fixed rate of the loaned amount, like a flat fee each month. This is an immensely inefficient way to do business. Most small businesses have good and bad months, and by forcing businesses to pay more in lean times they are killing the goose that lays the golden eggs.

But some firms are now offering quite innovative ways of structuring loans to small businesses. Beyond Merchant Capital, for instance, have made financing payments a win-win for both the lender and borrower through their Pay As You Trade financing strategy.

The Pay as You Trade edge

Beyond Merchant Capital changed the financing landscape in Australia by providing a more personalized and appropriate strategy for small businesses. Another company did the same in South Africa for small businesses there.

Rather than offer the usual ‘one size fits all’ financing product that most lenders do, these companies will devise a payment strategy that matches the ups and downs of your business’ cash flow.

There are no fixed term rates and you’ll instead get a fluctuating repayment structure. That way, you will be making smaller repayments if your firm is having some financial troubles. This will lessen the chances of you getting into the red and will help you achieve better business continuity. Many of these types of lenders will work with you closely and review your performance every two weeks, to allow periodic adjustments to the payment scheme.

What is more interesting is that this type of financing results in the borrower’s payment turnaround for the loaned amount being very fast, with most being able to repay the loans in three to 18 months. This effective financing strategy helps small businesses not only to survive, but to thrive in their formative years.