Even in normal times, small businesses can struggle to properly manage their cash flow—the balance of money that goes in and out of their business through revenue and expenses. In the ongoing fallout from the coronavirus pandemic, the issue of cash flow has become an immediate concern for millions of small businesses across the U.S. and around the world.
Whether it’s because the government has required your business to close or has severely limited your capacity, because foot traffic has slowed to a standstill, or because decreased demand has left you short on your loan payment this month—there are many ways that cash flow issues can crop up and derail your business in this unprecedented time.
Theoretically, you already know how to keep your business cash flow positive in moments when the economy isn’t wracked by the coronavirus. This is about taking emergency measures to stay afloat in the short and medium term until potential loans or bailouts from the government come into play.
Here are tips on how to deal with cash flow issues due to COVID-19.
Cut Unnecessary Costs
The first step is figuring out which costs you can cut right away. It goes without saying that you should cut any spending on travel for work and discretionary spending such as entertainment down to zero.
Take a hard look at your expenses and decide what costs can go for now (and potentially for an extended period). That could mean excess software subscriptions, experimental marketing spend (particularly those with negative or unclear return on investment), and in-office perks like food (especially since you probably will not be working from your office for an extended period if your business, like many others, has gone remote).
If you see upcoming costs on the horizon that you can avoid or postpone, it’s time to cut the cord on those as well. That may include a one-time audit, or contracts if they’re still in the negotiation phase.
As we’ll discuss below, there are also ways to convert your fixed costs into variable ones that you may need to shed over time, depending on how long this situation lasts.
Explore Your Loan Options
This is a confusing and difficult time to look for a business loan, but there are options out there for you and more will become available with time as the federal government passes legislation to fund the Small Business Administration’s loan programs in the wake of the novel coronavirus. You can also look into short-term financing via alternative lenders for a possibly more immediate solution.
Let’s review all of your possible loan options:
Update, 4/27/20: Congress authorized an additional $310 billion for loans to small businesses through the Paycheck Protection Program, and an additional $60 billion to finance the Economic Injury Disaster Loans program for businesses impacted by the coronavirus pandemic on April 23, 2020. President Trump signed the “Paycheck Protection Program and Health Care Enhancement Act” into law on April 24.
Thanks to this interim spending deal, the PPP re-launched on April 27, and SBA-approved lenders can once again review, process, and approve PPP loans. Additionally, the SBA announced it would continue to review and approve EIDL loan and advance requests already in its queue, with more information for new applicants to come.
Other SBA loan programs are also an option. The most popular SBA loan program is the SBA 7(a) loan which covers working capital needs, expansions, renovations, and more, and you can apply for that loan today. Keep in mind that SBA-approved lenders typically look for good credit scores and decent business financials.
SBA 7(a) loan program interest rates are currently extremely low thanks to a 3.25% market prime rate (effective March 16, 2020). Fundera can help you find an SBA loan program that is right for you, particularly in this extraordinary circumstance.
Perhaps the quickest source of short-term capital for a small business is a business credit card. You can use a credit card to pay off certain expenses and give yourself a little extra breathing room before it’s time to make tougher decisions.
The single best option for a small business owner in a moment like this is a credit card with an introductory period that features a 0% APR, if you qualify. This means you’ll pay no interest on purchases and/or balance transfers during the life of the offer (depending on the card). Keep in mind that once the intro period is up, a variable APR will set in at a rate depending on the prime rate and your creditworthiness. But until then, you’ll essentially have access to an interest-free loan for a short time.
The U.S. Bank Business Platinum card is a great option. It has the longest 0% intro APR period on the market at 20 billing cycles. The intro APR on this card applies to both purchases and balance transfers (which is helpful for consolidating any existing credit card debt you may have). Note that once the introductory period is over, your APR will vary depending on the prime rate and your creditworthiness.
Check out our complete guide for more business credit cards to use during the coronavirus outbreak.
A variety of online lenders, also known as alternative lenders, have cropped up in recent years to serve the needs of small businesses, which don’t get the same kind of funding opportunities as big businesses.
These lenders are known for their less-strict requirements (relative to bank loans), fast turnaround times (sometimes as little as a day), and higher interest rates.
It’s also true that in the wake of the coronavirus, many lenders will not lend to certain industries, such as restaurants and retail. Lower-risk industries will still be able to borrow from these lenders.
Either way, if you plan on applying for a loan through an online lender, consider (if possible) asset-based lending, such as equipment financing, invoice financing/factoring, or inventory financing. These self-secured forms of lending are lower risk and more palatable to lenders at the moment.
Read our guide on applying for emergency business loans if you need assistance here, as that information focuses on online lenders.
What if you already have a loan out and are afraid of defaulting?
Ask Your Lender for Assistance
If one of your biggest cash flow issues revolves around your existing loan payments, get in touch with your lender right away. Don’t assume that your loan payments will be put on hold or that you can count on loan forgiveness.
A strong existing relationship with your lender is important here. The vast majority of lenders will not want your business to fail due to the coronavirus pandemic and will try to work with you. Asking how they can help prevent you from defaulting on your loan is crucial and can buy you valuable time.
Extend Payables by Working With Suppliers
Lenders aren’t the only party that will likely try to work with you to extend your payment terms. If you’re able to take longer to pay your suppliers, you’ll preserve much-needed working capital. The best way to do this isn’t to ignore your standard payment terms but to work with your suppliers to come to a new agreement.
Ignoring your payment terms and forcing suppliers to accept an extension will damage your supply relationship in the long term, and may also affect that supplier’s ability to conduct their own business, which means you may not have a supplier in the near future. If your supplier is able to extend your terms comfortably, that’s a win for both of you.
Pull Your Cash out of Fixed Assets
Where possible, convert the fixed costs of your business into variable costs that you can continue to reduce over time if necessary.
For example, selling some of your equipment and then leasing the assets back is one way to raise emergency capital, increase flexibility, and remain in business. Moving to third-party warehousing and contract manufacturing are other examples of moving toward long-term flexible costs.
Contact Your Local Rapid Response Team During Layoffs
Another cost that seems like it should be “fixed” but may unfortunately become variable is payroll. Many businesses are finding that they don’t have the income to support employing their staff and have begun laying off and furloughing workers, or asking them to take unpaid leave.
A good rule of thumb: If you think you’ll miss payroll at some point soon, it’s better to lay off some people sooner, rather than everyone later. This is an extremely difficult but sadly necessary step for many business owners.
If this is the case for you, consider contacting your state’s Rapid Response team. Rapid Response is a resource available through the Department of Labor that responds to layoffs and closings by coordinating services and aid to companies and their affected workers, working to ensure rapid reemployment and minimizing the negative impacts of those layoffs.
Find out how to connect with your state’s Rapid Response team here.
Understand What Business Insurance Can Do for You
Now is also the time to get in touch with your insurance provider to understand whether your business interruption insurance policy covers you in the event of epidemics and pandemics such as this one. Coverage varies depending on the insurer, the policy, the industry, geography, and other factors. If you are covered, you’ll be in a much stronger position to cover costs than you would otherwise; and if you don’t, it’s important to know that information as soon as possible.
Unfortunately, at this moment it is unlikely that your business interruption insurance policy will cover the coronavirus outbreak. Legislation and legal action may change that in the coming months, however.
Consider Alternative Revenue Streams
In the best of times, it’s good to diversify your revenue streams and find a variety of ways to make money though your business. That “nice-to-have” tactic becomes a necessity in times like these. It may be time to explore ways to temporarily or even permanently replace pre-COVID-19 revenue streams.
That may mean shifting markets (from international to domestic, especially if your inventory is perishable), or using your fixed assets in a new way to create inventory and services that are of greater need at the moment. If you’re a brick-and-mortar business that primarily relies on foot traffic, can you move into delivering your wares locally or shipping them to new customers? Setting up a new online store is fairly easy with solutions from Square, Shopify, Volusion, and other platforms.
Look Into No-Interest Loans and Grants
More and more nonprofits and corporations are going to roll out low-cost loans and grants for small businesses, so keep your eyes open for new opportunities.
For example, Facebook just announced a small business grants program that will offer $100 million in cash grants and ad credits to 30,000 small businesses around the world.
You should also look into state-specific resources, which may also offer financial aid that is free or low-cost.
The Bottom Line
This is a situation that the modern global economy has never before faced. Small business owners who did nothing wrong must suddenly grapple with difficult decisions about the futures of their businesses and employees on short notice. If you can use any of the above tips to keep cash flow moving and remain in operation until more help arrives, you’ll have accomplished something that few other small business owners in history have had to deal with.
For more information about how the coronavirus outbreak may impact your business, read our guide covering possible outcomes, best practices, and more.