5 Ways to Manage Cash Flow Gaps Before Busy Season

Posted at 06:13h in Small Business Success by Kelly Hillock

Beach town ice cream shops, lake resort T-shirt shops, snowboard rental shops, and the businesses that provide services for similar seasonal businesses have options to manage cash flow gaps before busy season begins. These include:

Offering incentives for early payment and penalties for late payment.

Cutting or deferring expenses.

Short-term working capital loans.

Invoice factoring.

Purchase order financing or negotiating trade credit from vendors.

Each of these covers cash shortfalls for short time periods but the right choice for your business depends on your relationships with customers, whether there are expenses to cut without hindering operations, and your ability to qualify for different types of financing.

Billing Incentives and Penalties

Early payment incentives give customers a small discount in exchange for sending payment before it’s due, and even a little incentive can be enough for cash-rich customers to pay you now. Late payment penalties also encourage customers to make timely payments and help cover your short-term cash flow needs as long as you have timed your payment due dates to when your own bills are due.

Note: If the due date you gave customers is after the date where you need their payment to meet your own expenses, then an early payment incentive might help. But trying to change the penalty or “due by” date will only hurt your relationship with them.

Cut or Defer Expenses

Cutting unnecessary expenses, deferring necessary ones, and even finding substitutes for what you would buy all conserve cash before the busy season. It is easier than you think when you look holistically at where you’re spending money.

Option 1: Reduce Advertising Expenses

Reducing some of your planned advertising leading up to the busy season lets you use the cash for other expenses like training new people. Some ads become unnecessary expenses when the season is expected to be busier and you have a loyal customer base or are the brand to go to. You can also substitute some ad spaces for cross promotions with complementary companies like a hotel and a restaurant, or an event and concert venue with a late night bar.

Option 2: Defer Hiring New Team Members

If you’re unsure how busy the season will be, deferring new hires until you see how foot traffic begins to come in will save cash in the short term. This allows you to bring in new staff as the season picks up. The downside is you’ll have to train as the busy season is starting vs. having a fully trained team when it does.

Pro-tip: Talk to your accountant about switching from estimated quarterly taxes to the annualized income installment method for a lower tax bill now vs. a higher one after the season is over.

Option 3: Substitute Products and Services for Alternatives

Substituting products and services for complementary ones that deliver the same result but have different payment terms or a lower cost is a third option. Advertising is one example where instead of buying online ads that require payment immediately, try TV, Billboard, or other types of ads where you can get net-60 or net-90 terms and not have to pay for a couple months.

Working Capital and Other Short-Term Business Loans

Lenders offer different types of short-term business loans with rates and terms that vary based on the purpose of the loan, your business credit score, and your financial history.

A few types of short-term business loans that work for seasonal businesses include:

Working capital loans where funds can be used for almost any short-term need whether it’s hiring, rent payments, advertising, or other immediate operational needs.

Inventory financing loans where you can stock up on products ahead of the busy season and since the inventory works as collateral the rates will be lower than short-term loans without collateral.

Interest rates on short-term business loans tend to be higher than traditional long-term small business loans as there are less payment cycles to collect interest on and the lender is taking a higher risk by funding your cash flow gap.

The total amount of interest you pay during the term of the loan will be much less than a multi-year loan since the payback period is shorter. That makes them a good option to fund a short-term cash crunch when you know you’ll have the money to pay off the debt over the next few weeks or months even if the interest rates are higher.

Invoice Factoring

Invoice factoring is where you sell invoices or accounts receivable for cash now and the business you sell them to collects from the customer. This works differently from a business loan because with invoice factoring you’re selling an asset, not taking on debt. Factoring companies use what’s called a factor rate to determine how much they pay for the invoice by dividing the invoice value by the factor rate.

Selling a $100,000 invoice for a 1.1 factor rate gets you $90,909.09 in cash today ($100,000 / 1.1). Because the factor rate is based on your customer’s credit score and ability to pay, this is a great option for newer businesses that need to cover cash flow gaps before the busy season but can’t qualify for short-term business loans as they haven’t had time to build a good business credit score yet.

Purchase Order Financing or Trade Credit

Purchase order (PO) financing and trade credit are similar in that they both let you buy supplies and materials now, but pay later to avoid running into a cash flow shortfall. They’re different in which party gives you the credit.

PO financing is where a third party lends you money to buy what you need to fulfill a purchase order, meaning you must already have the PO or at least a contract. This can be a great option for businesses providing services to seasonal companies, by getting you cash for all the materials/tools you need to provide your services on Day 1 of the season before invoice payments start rolling in.

Trade credit is different in that your vendor extends the credit to you for supplies needed by letting you pay at a later date versus outright loaning you money. Depending on what you negotiate with vendors, this can work similarly to a loan where you pay a higher price at a later date, which works like an interest rate. Or you might be able to negotiate only paying extra if you don’t pay by a specific date, similar to a late payment penalty.

Any of these 5 options to cover short-term cash flow gaps will help your seasonal business keep the doors open and stock your store in advance of the busy season. The right way to cover your seasonal business’s cash flow gap depends on your business’s unique needs, financial situation, what your expenses are, and what kind of relationship you have with your customers and vendors.

QuickBridge does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors.