When your business is suddenly strapped for cash, what are your options for covering your cash needs until things smooth out again?
Cash flow is one of the most important parts of your business – no cash means you can't pay your bills! But even the most successful business can run into a rough patch and run short. When your business is suddenly strapped for cash, what are your options for covering your cash needs until things smooth out again?
In general, you're going to turn to a lender for those short-term needs. Depending on your credit history, the reasons your cash flow is off, and certain other factors, you may be able to get a short-term loan from a traditional bank. If not, there are also a number of alternative sources of funding you can check out.
But not all lenders are created equal and some can actually cause more problems than they solve. Pay Day Loans, Car Title, and other quick cash loans are often referred to as “predatory lending.” That's because these lenders aren't bound by the same laws as banks and microlenders, so you don't have much legal protection. They can basically charge you as much as they want. They don't expect you to be able to repay – they make more money if you get trapped in a cycle of debt and keep having to pay sky-high interest rates and fees.
1. Traditional Lenders
If you have an established business and a good relationship with your bank, you'll likely be able to get a short-term loan. That kind of loan is one of the safest and simplest options. You have all the protections of federal banking law, plus you're dealing with a lender that does this kind of deal all the time. This can be a quick process, since your bank already knows about your business. In addition, a short-term bank loan is likely to offer you the lowest interest rate of any of these options.
If you're denied by a traditional lender or don't find the terms appealing, then a microlender may be an excellent source of emergency business funding. Microloans can typically provide up to $50,000 for a small business to deal with emergency situations.
Micolenders offer a reputable, accessible financial solution for lending smaller amounts to small businesses. Their approval terms are more flexible than those of traditional lenders, so they're a great choice for new businesses that don't have much credit history or for businesses with a low credit score. Microlenders take a more holistic approach to approving loans; they get to know the business owner and operations so they don't have to make a decision based on credit score alone.
While a microloan may be easier to get than a traditional one, note that these loans also carry a higher interest rate. Learn more about microlending options from Accion Opportunity Fund to see what might work well for your business.
Crowdfunding is the newest option for raising cash. Essentially, you put your story and needs on a crowdfunding website and people can contribute cash. Many people have used crowdfunding to great success to assist in raising funds to help with medical treatments, disaster relief, or other worthy causes.
Online platforms allow you to share your emergency funding needs and request help from others. While there are multiple platforms accessible, Crowdrise is the best place to go if you're looking for charitable donations to offset medical emergencies or other causes. Kickstarter is the place to go for small business funding needs.
Note that crowdfunding is more commonly used to start up a new business, so it's a slower process than some of the other choices.
4. Friends and Family
Sometimes the best way to get through an emergency is with the help of friends and family. If you find yourself in a financial emergency, then reaching out to friends and family for a financial boost can help you stay afloat.
If the goal is to pay back the loan (as opposed to gift funds), then make the exchange contractually valid with a promissory note. Once you sign the promissory note, then stick to the terms of repayment as agreed upon.
It ily for money, but remind yourself that everybody falls on hard times at one point or another. It's possible that some day you may even be able to repay the favor. The trick is to keep everything official – make sure your payback terms are clear so that everyone knows what to expect (and agrees up front) to help avoid conflict.
Get The Cash You Need
Every business needs cash and most businesses will run a little short at some point. The good news is that you have plenty of options for picking up a short-term loan to cover your shortfall. Just make sure you take a close look at the terms and conditions so you know exactly what you're getting into.
For a more in-depth analysis of common predatory warning signs, check out our guide to predatory lending. Getting the cash you need up front isn't going to help if it ends up trapping your business in debt.