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The Top 3 Small Business Financial Challenges—and How to Alleviate Them

Riley Panko

Riley Panko is a Senior Content Developer and Marketer at Clutch, a Washington, D.C.-based research, ratings, and reviews platform for B2B services.

Small businesses face a number of daily obstacles, but financial ones can be the most complicated. Understanding how to prepare for and handle these challenges can be critical to the success or failure of a small business. What are some of the most common small business financial challenges and how can they be alleviated?

This article will walk through the top three small business financial challenges, offering tips to overcome them.

The Top Financial Challenges Small Business Owners Face

Clutch surveyed 302 business owners and managers to determine their biggest financial challenges. The top three pain points were:

  1. Unforeseen expenses: 35% of respondents
  2. Mixing business and personal finances: 23% of respondents
  3. Not receiving payments on time: 21% of respondents

Let’s dive deeper into each of these challenges and how they can be managed.

small business financial challenges

1. Unforeseen expenses can be mitigated by budgeting.

Thirty-five percent of respondents in the Clutch survey cited unforeseen expenses such as fees for permits and licenses, unanticipated tax liabilities, or inventory that has been lost, stolen, or spoiled, as the biggest financial pain point they face.  

The unexpected costs faced by small businesses can take many forms, notes Mainstreet ROI, a digital marketing agency based in New York City. They can include:

  • Insurance costs
  • Professional fees
  • Costs of maintaining or replacing aging equipment
  • Paying for the benefits and training of new employees
  • Credit card fees

In addition, many small business owners are uncertain about how they are affected by recent changes to the U.S. tax code.

“They just don’t want to be caught off guard or have any curve balls,” says Rhett Molitor, co-founder of Basis 365 Accounting, a cloud-based accounting service.

Wanda Medina, managing partner at Maventri, a full-service digital firm providing accounting, marketing, and administrative support services, says the problem of unforeseen expenses is compounded when companies do not have budgets in place to address such costs. Putting together budgets that include room for unanticipated expenses can help businesses weather the costs.

Mainstreet ROI also recommends reducing unforeseen expenses in areas such as insurance, professional fees, and credit cards by shopping around for the best policies, payment terms, or rates. In addition, business owners should review their expenses often, both to identify which purchases are costing the most money and to look for savings.

Bottom line: Unforeseen expenses are a part of life for a small business owner. Yet there are ways to train for the impact, including preparing a budget that can handle surprises, and shopping around for policies and rates that will reduce the costs of insurance and other services.

2. Avoid the temptation to mix business and personal finances.

More than one-quarter of small businesses do not have a separate business bank account for their business, according to the Clutch survey. Perhaps it comes as no surprise then, that 23% of respondents identified mixing business and personal finances as a challenge facing their companies. Their concern is well-founded: Commingling business and personal funds is a risky practice that makes it difficult to monitor cash flow and could ultimately damage the value of a company.

“It complicates the ability to know how your business is running,” Medina says. “It’s something that we always try to make sure that our clients no longer do.”

Many companies that mix funds are sole proprietors or single-member LLCs, she says. These companies may think their status doesn’t necessitate a separate business bank account.

“They assume because they’re a Schedule C type of client that it all goes in the same bucket,” Medina says.

But businesses of any size or status can benefit from separating their business and personal funds.

“It’s a big factor with small businesses, and it’s probably one of the biggest issues that we see when they’re running out of cash,” Medina adds.   

Furthermore, commingling of funds can raise red flags for anyone examining a company’s financials, including tax auditors, potential business partners, or potential business purchasers.

“If the IRS or anybody else needs to start looking at numbers, then it just gives them a reason to doubt what they’re seeing and look harder and, in many cases, find things that are being deducted or expenses that shouldn’t be,” says Molitor. “If you have a small business, I don’t care how small, even if it’s not a business account, create a separate personal account and keep it separate.”

Bottom line: Mixing your business and personal finances may seem to be a convenient time-saver, but it carries big risks that could ultimately damage the value of your business. Establishing separate accounts is an easy fix that will allow owners to keep better tabs on how their business is performing.

small business financial challenges

3. Late payments frustrate small business owners.

Having trouble getting paid on time is not unusual for small businesses. More than one-fifth—21%—of small business owners and managers in the Clutch survey report that dealing with late payments is a top financial challenge. That can be a problem for a small operation with its own bills to pay to creditors who are perhaps not so easy-going when it comes to due dates.

But there are steps a business can take to speed up the time it takes to receive payments.

Xero, a cloud-based accounting platform, has a small business guide with tips for invoice payment terms. Xero notes that the once-standard 30-day payment terms are becoming obsolete now that sending bills via mail and making payments via check are being replaced with electronic invoicing and online payment. These days, requesting payment within two weeks is becoming more commonplace.

Xero also points out that the more quickly an invoice is delivered, the more quickly a company will be paid. With electronic invoicing, bills can be sent out on the day of service. Take care to ensure that bills are sent to the person responsible for making payments—he or she might not be the same person who contracted the work. Invoicing software can also ensure that friendly reminder emails are sent as due dates approach and again if they are missed.

Bottom line: Late payments are a common annoyance for small businesses. But modern tools such as electronic invoicing can help shorten the time between doing the job and getting paid for it.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

Riley Panko

Riley Panko is a Senior Content Developer and Marketer at Clutch, a Washington, D.C.-based research, ratings, and reviews platform for B2B services.

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