Virtually every small business, no matter its focus or industry, can fall prey to financial issues from time to time. Widespread crises like pandemics can instantly amplify these effects and have left many SMEs in the lurch in 2020.
Over and above the effects of challenging times, entrepreneurship is fraught with difficulties itself. Both experienced and novice business owners face significant challenges, and their nature can vary widely. Arranging funding for start-ups, maintaining cash flow, and dealing with strapped budgets are all part of an entrepreneur’s day to day operational obstacles.
If your small business is facing concerning fiscal challenges, you’ll need to approach them delicately and deliberately with the right mindset. Experts recommend tackling such challenges as they arise, rather than leaving them to snowball into much larger problems later down the line.
Here are solutions to 5 of the most common money troubles facing small businesses today.
Issues with Capital
Banks are becoming increasingly strict and discerning in terms of which small businesses they are willing to risk financing. This has unfortunately left many business owners in a tricky position, forcing them to drastically reduce their capital budgets.
Thankfully, there are many ways to secure financing for small businesses that don’t involve conventional bank loans. You could turn to friends or family members for assistance or perhaps go into business with a like-minded partner who can offer the capital you need to stay operational.
Many entrepreneurs view self-fueled growth models as the least risky and most effective way to operate small businesses. Instead of trying to secure funding to establish your company overnight, focus on your primary customers and offer value-added services to them. Your business will probably grow automatically thanks to word of mouth. However, if you do still require outside funding, it’s recommended that you speak to an attorney to avoid any potential future complications.
Restricted Cash Flow
Most small businesses cannot stay afloat without a certain amount of cash flow. You can perform tasks timeously, send out invoices, and only receive money after a month—if at all. In the interim, you will be left to address all of your business-related costs like salary payments, infrastructural costs, and personal expenses.
The solution in this case is to meticulously plan and budget your operations to maintain cash flow however you can. An effective way of boosting cash flow is requesting down-payments when you receive orders from clients. This money will allow you to address your expenses and keep money aside for unforeseen costs.
You could also request faster invoice settlement terms, as this will buy you extra time if clients are not prompt payers. Additionally, you could approach your vendors and request that they invoice you after 45, 60, or even 90 days. This is a somewhat unconventional approach, but if you’re in good standing with your vendors, it could help you to loosen your cash flow and keep your small business in the clear.
Tight Marketing Budgets
Even if your business has sufficient cash flow, you may have a tight budget for promoting your products and services.
To remedy this, remember that every entrepreneur deals with budget issues from time to time. You can reduce the frequency of this phenomenon by optimizing your marketing efforts. Spend your advertising cash where it will maximize your ROI and use the remainder for other infrastructural costs and marketing experiments. Don’t take risks with your marketing, rather play it safe and simple as you won’t always recoup your costs.
Worryingly Low-Profit Margins
If you’ve noticed a sudden dip in your once-strong profit margins, you’re not alone. Many small businesses are facing similar issues in 2020—especially those who don’t operate exclusively online.
To begin addressing this problem, you should create a weekly or monthly forecast of your cash flow based on your current financial results. Your forecast should include detailed cash flow estimates, such as invoices paid by clients, and financial outflows like vendor payments, salaries, and rental costs.
In this specific scenario, it’s helpful to bear a worst-case scenario in mind. Develop a pessimistic forecast and assess it against your cash flow. If you’re still generating an income, you should be in the clear. If not, however, you will need to find ways to boost cash inflow and reduce outflow until your profit margins have stabilized.
Debt and Loan Defaults
Defaulting on loans can be devastating for your business and your own financial standing. If you borrowed money before the pandemic struck, you might be struggling to repay it now. The last thing you probably want to do is discuss those debt-related issues with others—but that’s precisely what you need to do.
If you fear that you may default on a loan, immediately contact your lender. Approach them with the facts and figures relevant to your situation, and if possible, calculate how much of your loan you can repay, and where you need leeway. They will often be willing to negotiate reduced rates and lower interest-only payments to assist you temporarily.
Alternatively, if you don’t contact your lenders in good time, you may face the bank demanding immediate repayment in full. If you cannot pay, they can repossess your collateral and sell it off to repay the loan. Rest assured that most lenders will appreciate your honesty about your financial situation. It allows both parties to explore more options for solutions and to find a flexible fix that works for all involved.
The Bottom Line
If your small business is facing financial issues, you’re not alone. A huge percentage of SMEs tackle fiscal fiascos from time to time, and not all of them survive.
Your best approach if you are facing monetary concerns is to be proactive and to tackle problems head-on. Don’t wait until they have spiraled out of control or until a bank representative shows up at your door. There are many ways to ensure that your business operates smoothly and continues to generate a profit, even during difficult times.
Nina Sharpe is a content champion for various outlets, covering various business topics from finance for startups to small business accounting tips.