Credit may not always be the solution to small-business cash flow problems. At times, credit could make problems worse.
Credit Comes With Costs
At the most basic level, business success is often determined by cash flow. Cash outflows are required to meet financial obligations, and the money needed for these bills is obtained from cash that flows into a business as a result of sales. Some small-business owners can find that it is difficult to meet all of their cash flow obligations at times.
Because expenses are incurred whether sales are made or not for most small businesses, it is very possible that the outflows can exceed cash inflows for a short period of time. Credit can often provide a needed infusion of cash into a small business, and allow a business to overcome this problem.
It is important to remember, however, that credit comes with costs. Borrowers will need to pay interest on the money they borrow, and because small-business loans are considered risky, the interest rates can be high.
Be Certain the Problems Are Short-Term
If the problem is temporary, such as a slowdown in seasonal sales that will be reversed soon, a loan can be a lifeline for a small business. However, before using credit to overcome cash flow shortfalls, the small-business owner should be certain that the problems are truly temporary. If business conditions have changed permanently, credit might simply delay the inevitable dissolution of the business.
Small-business owners often face cash flow problems, and these problems can be either short-term or long-term. If the cash flow analysis shows the problems will be long-lasting, credit may not be the answer. When you first notice problems paying your bills, prepare a detailed financial projection that will help identify the source of the problem. Allow the numbers to determine if credit is the answer, or merely an additional cost that will need to be addressed later.