3 Ways to Secure Cash Infusions for Small Businesses

Stacks of coins in a row, concept for cash infusions

There is no shortage of advice online about what small businesses need to do to expand or grow their operations during tough economic times. They talk about marketing efforts, restructuring lease agreements and debt, or moving business online. These articles might be all well and good, but they might be ignoring your biggest concern as a small business owner currently – cash infusions.

It’s understandable if you read some of the aforementioned articles and think: “That’s great, but I need money, and I need it now!” It is ubiquitous for small businesses to find themselves in a low cash situation, struggling to stay afloat. However, plenty of small businesses know that they can be viable if they can survive any dry spells that come their way.

Suppose your company is in dire need of an immediate cash infusion. In that case, you can consider three different ways of obtaining it: applying for borrowing from the government, institutional borrowing, or borrowing from clients (or against your future earnings). Let’s get into each cash infusions method and examine the advantages and disadvantages. But first, let’s go over cash infusion meanings related to your small business.

In Business, What is a Cash Injection?

Cash injections, or cash infusions, are when a business receives a lump sum of cash, equity, or debt that the business will use to maintain or grow its operations or execute its strategic plans. Cash infusions are typically associated with companies that are struggling to stay afloat, but that is not always the case. There are lots of reasons why small businesses find themselves strapped for cash.

How Do Cash Flow Problems Arise?

Everyone expects a start-up to have investment needs. After all, you can’t get a business off the ground without some seed capital. But many small business owners are caught off guard down the line when they continue selling services but find themselves unable to cover expenses.

Let’s share an example that illustrates how cash flow problems can pop up. Take the construction industry. A general contractor who is fully booked with business cooking just can’t seem to get his hands on the cash he needs to keep the projects moving forward. Even when he secures a large deposit from a new client, this is the case. What gives??

This general contractor finds himself in a situation that is relatively common in service-based industries. In a version of Peter and Paul, business owners rob future jobs to pay for the expenses being incurred on the current one. Before they know it, the cash flow has dried up with a host of expenses piling up.

So, how can a small business recover from negative cash flow? Here are three ways to boost cash flow to your business:

  • With an SBA loan through the US Small Business Administration
  • Private borrowing from banks and other financial institutions
  • “Borrowing” money from your clients with earned accrual accounting

1. Cash Infusions Through the US Small Business Administration (SBA)

The 800-pound gorilla in this category are the loan options administered through the US Small Business Administration (SBA). There are many different loan options through the SBA, the most popular of which is the 7(a) loan. Although competition for these loan programs can be fierce, they offer some of the best short-term business loans out there. If your business is strapped for cash, an SBA loan could be just the solution

Pros: The cost of borrowing money is going up but remains lower than other options when you go the SBA route. Check out the various loan programs and SBA loan rates for 2022 here.

Cons: Yes, there are some disadvantages. The biggest is that the government support comes with restrictions on how you can use the funds. There may also be additional reporting requirements.

2. Borrowing From Institutions and Banks

Another option is obtaining a personal or business loan from a bank. Interest rates are on the rise right now, but if your business needs cash, it’s still a decent time to borrow money. While there are times when it is not prudent to do so, there may also be some merit to borrowing a credit card to tide you over until your business is back on its feet.

Pros: The funds received from private cash infusions may be spent on business operations with fewer restrictions on the types of expenditures than the government programs.

Cons: You will be incurring interest charges, and thus the cash infusion is going to cost you. Of course, the interest rate on credit cards is particularly high, so business owners should weigh the cost of any credit card borrowing against the benefits. In addition, you run the risk of not being able to pay back any loan if your business situation worsens.

3. Borrowing from Clients

No, you’re not going to ask a well-heeled client to spot you $100, but there can be strategies to encourage customers to pay upfront and secure your business.

One way is to offer them a product or service in exchange for committing money upfront—for example, with distilleries that could look like a whiskey-of-the-month or beer-of-the-week program. (For our general contractor friend mentioned above, it could be collecting a large deposit upfront.)

Likewise, if you provide memberships to an exclusive club, you could offer a discount to customers who pre-pay membership fees early. In addition to giving recurring revenue, such offerings also help encourage loyal customers.

A plan like this might sound like small potatoes, but remember that the timing of payments is essential. For example, if you collect money at the beginning of the month for something you deliver at the end of the month, you get to use that money during the period of time in between. It’s called earned accrual accounting, and it can help keep your business afloat.

Pros: You don’t have to pay the money back. These cash infusions are yours to keep, scot-free.

Cons: You run the risk of pre-selling a product or service you can’t deliver for reasons beyond your control, which would require you to refund the money. You should also avoid the gift-card trap. If you collect a lot of money now for gift cards that customers will use in the future, that can create an obligation that you will have to fulfill at some point (displayed as a debt obligation on your books).

How KBS CFO Helps Small Businesses Needing Cash Infusions

Cash infusions and finding funding, in general, are a lot like going into battle—you shouldn’t get started without having an exit plan. That is why it’s important to be very careful about what you are borrowing, how you are borrowing, and how much you are borrowing. Above all, it is crucial to have a repayment strategy in place.

KBS CFO is here to help you maintain positive cash flow. Our team specializes in serving the finance and accounting needs of the craft spirits industry and has a solid understanding of the key obstacles to growth and profitability. In addition, we provide strategic, anticipatory CFO services for distilleries with an eye toward supporting the development and sustainability of your business. Contact us to learn how we can help with innovative strategies for your Washington D.C.-based company.