3 Ways to Secure Cash Infusions for Small Businesses in 2024
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 – 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, small businesses can survive any dry spells that come their way by knowing how to secure cold hard cash, quickly.
Suppose your company is in dire need of an immediate cash infusion. 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 infusion 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 Infusion?
Cash infusions, also called cash injections, 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 or in need of 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. Revenue is rolling in. So why do these businesses find themselves in trouble?
Here is 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 while expenses continue 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.
There are requirements for how SBA loans can be used. Qualifying expenditures include:
- Buying, refinancing, or making improvements to buildings or real estate
- Working capital to be used in the short or long term to cover operational expenses
- Refinancing debt the business already holds
- Costs associated with buying or installing equipment or machinery
- Purchasing supplies, furniture, or fixtures
- To cover expenses related to a change of ownership
- A combination of any of the above expenses
Pros: SBA loans tend to be easier to secure than commercial loans. Additionally, fees tend to be lower than commercial loans. Rate comparisons depend greatly on the commercial options you are comparing the SBA rate to as some banks offer fiercely competitive rates, especially in a borrowing climate like what we’ve seen in the last year. Check out SBA loan rates for 2024 here.
Cons: Yes, there are some disadvantages. The biggest is that there are restrictions on how you can use the funds as shown above. SBA loans also may take longer to fund than privately held commercial loans.
2. Borrowing From Institutions and Banks
Another option is obtaining a personal or business loan from a bank. The cost of borrowing money experienced a steady climb last year, but some analysts expect things to gradually cool down in 2024. While there are times when it is not prudent to do so, there may also be some merit to using 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. You get the loan and get to decide how you spend the funds.
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. With ingenuity and innovative thinking, you can inject your business with cash without actually borrowing it.
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 several verticals, including the craft spirits, distillery, and construction contractor segments, and has a solid understanding of the key obstacles to growth and profitability in each of them. In addition, we provide strategic, anticipatory CFO services for distilleries and construction contractors 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.