Porters Bar & Grill in Boston is a lively neighborhood watering hole for concert-goers and sports fans alike. Located near TD Garden (home of the Celtics and Bruins), the pub is a popular destination for after-hours visitors looking for comfort food and local beer.
But in the summertime, the area goes dark, the ice on the hockey rink melts, and the event facilities furlough their employees. With its busy season heavily concentrated between October and April, the lean summer months present a tough cash flow situation for Porters.
Not all businesses experience the same degree of seasonality as Porters, but most businesses do have predictable times of year when business is significantly slower. These large swings in revenue make it difficult to manage cash flow throughout the year.
The harsh reality is most small businesses fail within five years because they don’t have the capital to keep the doors open, according to a new study. The life expectancy of businesses in specific industries is closely tied to the cash flow challenges each presents:
Real estate: 9 years
Health care services: 8.8 years
High-tech services: 6.2 years
Construction: 5.1 years
Personal services: 4.9 years
Wholesalers: 4.7 years
Repair & maintenance: 4.6 years
Retail: 4 years
Restaurants: 3.7 years
The study also reveals that working capital loans and lines of credit can help small businesses manage irregular cash flow and extend the life of their operations. The research shows that cash flow management is as important as liquidity. If a small business can’t properly manage its cash flow, it’s unlikely to grow. With a loan to get through the lean months and get cash flow back on track, Porters Bar & Grill has far exceeded its life expectancy and is positioned to increase its annual revenue.
There are many ways to manage cash flow in a seasonal business, or to handle the peaks and valleys in revenue that every business experiences. But when it comes to using smart financing to solve this big problem, the secret lies in being proactive about accessing capital. Sometimes, the best money making apps can help you gain additional income.
Here are five ways to put this principle into practice.
Invoice financing is easy to confuse with invoice factoring, and it’s helpful to know about both. Invoice factoring allows your business to sell its invoices at a discount in exchange for a lump sum of cash. Invoice factoring can provide immediate working capital to help cover any cash flow issues and is typically easier to get approved for than traditional bank loans.
But, traditional invoice factoring generally requires you to sell your unpaid invoices to a third party factoring company. Your customers then pay the factoring company—not you. A slightly different approach called invoice financing can help you avoid this less-than-ideal repayment scenario, giving you access to a revolving credit line that won’t affect your client relationships.
Business credit cards
A business credit card is great for capital upgrades such as computers but can also be handy for emergency situations and slow seasons. Like personal credit cards, business credit cards offer the benefit of rewards like cash, points, or miles based on how much you spend.
If you have trouble staying within budget or tend to overspend, be careful with cards. Also be aware of annual fees and interest rates, and take advantage of promotional rates when you can. Always do your research before applying.
Lines of credit
A business line of credit is a loan that allows you to withdraw money, when you need it, from a set amount instead of borrowing a lump sum. Business lines of credit are a great option if you’re looking to buy goods, grow your business, and/or expand your company, and they can also be an invaluable lifeline in case of an emergency or a cash flow crunch.
Short term loans
A short term business loan can keep your company operating through slower seasons and help you cover unplanned expenses. They’re also handy for helping you finance unexpected growth opportunities that pop up. Short term loans typically offer smaller funding amounts with higher interest rates—around 10% and higher—and they have shorter repayment periods. It’s not uncommon for lenders to request that borrowers pay back the loan on a weekly or daily basis.
Cash advances are quick and unsecured, which means you won’t have to forfeit any personal or business assets if business is bad. Because there is no fixed term with cash advances, they can be a great solution for businesses that need to pay less during slower months.
Cash advances generally come with a high annual percentage rate, and this can make them far more expensive than a traditional business loan. Business owners should proceed with caution to fully understand the terms and properly vet any cash advance provider before jumping in. Make sure you understand the provider’s interest rates, how the rates compare to other loan products, and how they compare to other providers’ rates.
When it comes to managing cash flow crunches, aim to play offense, not defense. When you’re proactive about accessing funds you can build a safety net for cash flow emergencies as well as better support innovation and prevent missed opportunities for your business to grow. Proactive financing will allow you to make things happen, rather than waiting for something to happen so you can take your business to the next level on your timeline.
Check back next month for part 3 of our series, How Smart Financing Can Solve Big Problems for Small Businesses, where you’ll learn helpful strategies for how to stay passionate through the ups and downs of running a business.
No matter the size, the time in business, or the industry, every small business faces a myriad of challenges daily. Access to capital is arguably the biggest roadblock to every business owner’s ability to address these pains and problems. This 5-part series pinpoints some of the most common bumps in the road for small business owners as well as smart, effective solutions for navigating these challenges. Learn how to deal with hiring frustrations, cash flow woes, business owner burnout, customer retention issues, and time management struggles, as well as how to be proactive rather than reactive when it comes to accessing the funds you’ll need to face these issues head on.