When starting or running a small business, one of the biggest issues that business owners run into is a lack of capital. Sudden unexpected expenses are common and can unfortunately sink a business within a few months.
In order to survive long-term, small businesses should always have access to some sort of financing or funding, such as a low-APR credit card, or an easy way to utilize your retirement funds. Though most financing comes with interest fees and other payments, they can be helpful lifelines that are less expensive in the long run—especially compared to emergency cash flow options such as merchant cash advances.
You might think you have a handle on your company’s cash flow. Here are five reasons why you need a financing backup plan, just in case:
You identify a sudden growth opportunity
Let’s say you have healthy margins and cash flow, and your business is growing steadily. However, you become aware that your inventory supplier is offering a deal on bulk purchases, or that you can get your hands on upgraded machinery that would double production. These opportunities sound great, but they require you to be more liquid than you can afford right now. With an infusion of capital, you can access those deals and quickly make back your investment—and then some.
Your cash flow is wildly inconsistent
One of the biggest issues B2B companies face is inconsistent cash flow as a result of clients failing to promptly pay their invoices. Some companies may wait until the very last day of a 30-day cycle to pay you, while others insist on longer cycles altogether. As a result, you’re often left to fend for yourself when it comes to paying bills. A consistent form of financing, such as invoice financing or factoring, can help you level out inconsistent flow.
You need help with expansion costs
Again, the opportunity to make more money by expanding your business entirely—opening a new location, renovating your existing location, or starting up new product or service lines—means you’ll have to spend money now to make it back later. Lots of financing options are available for businesses seeking specifically to renovate or expand their business, at affordable rates.
You experience a disaster—or your suppliers do
Emergencies, as the result of natural disasters or economic ones (such as the recent government shutdown), can crop up at any time. Even if your business is insured and you expect to make your money back, 40-60% of businesses never reopen following a disaster. Getting back to business quickly after a setback is key to staying solvent in the long run, which is where financing comes in handy.
Additionally, you don’t even have to be directly impacted by an emergency to feel its impact. If your suppliers or customers are affected, your inventory or sales could suffer unexpectedly.
You need a way to build credit for the future
A backup source of financing that you use sparingly but responsibly—such as a credit card or line of credit—is a great way to build up your business credit history. You may not be ready for a term loan or SBA loan that can transform your business, but by making on-time payments for little things such as office supplies or to pay for accounting software, your backup plan actually becomes a springboard for more affordable financing down the road.
Small business financing shouldn’t be your first option as a business, because going into debt is always a risky move. That said, a backup source of funding can be the difference between staying afloat and going out of business, so keep your eye on financing that makes sense for you. You’ll be happy you did.
About the Author: Christine Soeun Choi is an SEO associate at Fit Small Business specializing in digital marketing. Currently based in NYC, she has a background in business studies and math with a passion for business development. When not helping small business owners, Christine enjoys taking photos, exploring artwork, and traveling.