What to do if your company is running out of cash

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What to do if your company is running out of cashWhen a company is running out of cash, it means that it is facing a severe financial crisis. This situation can occur due to various reasons such as poor financial management, excessive spending, a decline in sales or revenue, or unexpected expenses.

When a company does not have enough cash to meet its immediate financial obligations such as paying salaries, rent, or suppliers, it may have to resort to borrowing money, selling assets, or cutting costs. In extreme cases, the company may have to declare bankruptcy or shut down its operations.

Therefore, it is crucial for companies to have sound financial planning, monitoring, and forecasting to avoid running out of cash and maintain their financial stability

How to save your business when you’re running out of cash

When a business is running out of cash, it is crucial to take immediate action to save it. This may involve cutting costs, increasing revenue, securing funding, or seeking professional help to navigate the financial crisis.

Short-term business loans

Short-term business loans are a type of financing that provides businesses with quick access to funds to cover their immediate financial needs. These loans are typically repaid within a period of 3 to 18 months, making them an ideal solution for businesses that require cash flow to cover short-term expenses. Short-term business loans are commonly used to cover unexpected expenses, such as inventory purchases, equipment repairs, or temporary cash flow gaps.

They may also be used to take advantage of business opportunities that require immediate investment. However, it’s important to note that short-term loans usually come with higher interest rates and fees compared to traditional long-term loans. Therefore, it’s crucial for businesses to evaluate their financial situation carefully before taking out a short-term loan to ensure that they can afford the repayment terms.

Cash flow loans

Cash flow loans are a type of financing that focuses on a company’s ability to generate cash in the future. These loans are designed to help businesses that are experiencing temporary cash flow problems by providing them with access to the cash they need to continue operating. Unlike traditional loans, cash flow loans are not based on collateral or credit scores, but instead, they are based on a company’s projected cash flow.

This makes them an ideal solution for businesses that may have a weaker credit profile but have a strong revenue stream. Cash flow loans can be used to cover various expenses such as payroll, rent, inventory, or equipment purchases. However, it’s important to note that cash flow loans usually come with higher interest rates and shorter repayment terms compared to traditional loans. Therefore, businesses must carefully evaluate their cash flow projections and repayment capacity before taking out a cash flow loan.

Alternative overdrafts

Alternative overdrafts are a type of financing that provides businesses with access to funds that exceed their account balances. Unlike traditional overdrafts, which are provided by banks, alternative overdrafts are offered by alternative lenders, online platforms, or financial technology (fintech) companies. These types of overdrafts are often more flexible and accessible than traditional overdrafts, with lower fees and interest rates. Alternative overdrafts can be a useful solution for businesses that need to cover unexpected expenses, such as a sudden drop in revenue or an unexpected expense.

However, it’s important to note that alternative overdrafts should be used responsibly, as they can lead to additional debt if not managed properly. Therefore, businesses must carefully evaluate the costs and terms of alternative overdrafts before taking them out to ensure that they are the best option for their financial needs.

Invoice factoring

Invoice factoring is a type of financing that allows businesses to convert their outstanding invoices into immediate cash. In this process, a factoring company purchases the unpaid invoices at a discount and provides the business with an immediate cash advance, usually up to 80% of the invoice value. The factoring company then collects the full payment from the customer and pays the remaining balance, minus a factoring fee.

This type of financing can be particularly useful for businesses that have a high volume of outstanding invoices and are facing cash flow issues due to delayed payments. Invoice factoring can help businesses improve their cash flow by providing them with immediate access to cash, without having to wait for payment from their customers.

However, it’s important to note that invoice factoring can be more expensive than other types of financing and may impact the relationship between the business and its customers. Therefore, businesses must carefully evaluate the costs and benefits of invoice factoring before taking it out to ensure that it aligns with their financial needs and goals.

Crowdfunding and P2P finance

Crowdfunding and peer-to-peer (P2P) finance are alternative forms of financing that have become increasingly popular in recent years. Crowdfunding involves raising funds from a large number of individuals through an online platform, while P2P finance involves borrowing money from individuals or investors through an online platform. Both crowdfunding and P2P finance can be useful options for businesses that are looking for funding and are unable to secure traditional financing.

These forms of financing can offer several benefits, including lower interest rates and fees, flexible repayment terms, and a faster funding process. It’s important to note that crowdfunding and P2P finance can also come with some risks, including the possibility of not reaching the funding target, the risk of default, and potential legal and regulatory challenges. Therefore, businesses must carefully evaluate the costs, benefits, and risks of crowdfunding and P2P finance before deciding if they are the right option for their financial needs.

Take a step back

In addition to exploring various financial solutions and funding options, it can be incredibly beneficial for company leaders to take a step back and assess the bigger picture when faced with cash flow difficulties. While it’s important to be proactive and make critical decisions, it’s equally important to avoid micromanaging and getting bogged down in every decision.

Ultimately, what matters most is that leaders focus on making sound decisions and implementing effective strategies that have the best chance of success. This often requires taking a more comprehensive approach and distancing oneself from the immediate challenges that arise on a day-to-day basis.

Sell non-essential assets

When a company is rapidly depleting its cash reserves and other financial solutions are not viable, selling non-essential assets can provide some relief from the mounting pressures. It can be challenging to determine which assets are critical and which can be sold in a crisis situation.

In such circumstances, companies may have to take difficult measures. If insolvency is a realistic possibility, assets may have to be liquidated eventually. Nonetheless, selling assets voluntarily can give the company more financial flexibility at an earlier stage and potentially obtain better sale prices. This can help mitigate some of the cash flow issues and reduce the need for drastic measures.

End non-essential supplier and employee relationships

When a company is facing significant financial difficulties and its future is at risk, the leadership team is often forced to find cost savings wherever possible. This entails closely examining all expenses and assessing the roles that employees and suppliers play in the company.

It can be necessary to sever long-standing relationships with reliable suppliers and make difficult decisions to let go of employees who have done nothing wrong. However, in such situations, tough choices must be made. If the alternative is insolvency, there may be no other choice in the long run to protect the company’s employees or maintain relationships with suppliers whose contributions are not essential.

Maintain good communication

In times of financial distress, transparency and effective communication can play a critical role in saving a company. It’s imperative that directors keep all stakeholders informed and ensure that everyone is working towards the same goals. Internal confusion and lack of information can be harmful to the company’s prospects, particularly when it’s essential to make decisive decisions and pursue specific strategies.

Creditors also have a right to know if they cannot be paid in full, and an honest approach is more likely to elicit cooperation between a struggling company and its creditors. Being upfront about the situation can potentially lead to crucial support and assistance that can help save the company from further financial difficulties.

Get good advice where you can find it

Obtaining sound business advice is crucial for any company facing financial difficulties. There are several sources available to entrepreneurs and business owners to get the guidance they need. One option is to seek out professional advice from financial consultants or business coaches who specialise in working with companies experiencing financial hardship.

Another option is to turn to industry-specific organizations, such as trade associations or local chambers of commerce, which may offer tailored advice or access to resources. It’s also essential to keep up-to-date with relevant news and industry trends that could affect the company’s financial situation.

Taking the time to research and network with other business owners can also provide valuable insights and advice. Ultimately, the key to getting good business advice is to seek out reliable and trustworthy sources and be proactive in addressing any financial challenges that the company may face.

Read more: Identifying cash flow problems

Conclusion

When a company is running out of cash, directors must take prompt action to address the situation. The first step is to assess the company’s current financial position, including its cash flow, debt obligations, and potential revenue streams. Directors should then consider all available options to increase cash flow, such as negotiating with creditors, cutting costs, or seeking external funding through loans or investment. It’s essential to prioritize the most critical expenses to keep the company running, such as payroll and essential operating expenses.

Communication is also critical at this stage, both internally with employees and externally with suppliers, creditors, and investors, to ensure that all parties are aware of the company’s financial position and the steps being taken to address it. By taking decisive action and being proactive in addressing the company’s financial challenges, directors can increase the chances of turning the situation around and ensuring the long-term success of the business.

Business Finance Expert at Business Insolvency Helpline | + posts

Lee Jones is a seasoned expert in the field of business finance with over two decades of experience. With a keen understanding of financial markets and a passion for helping businesses thrive, Lee has become a trusted advisor to countless companies across the United Kingdom.