Quick cash flow fixes: 3 pitfalls to avoid

Businesses

Cash flow is critical to the success of a small business, especially during the early years of operation. So when you’re in a tight spot having access to fast cash (through overdrafts, credit cards, pre-approved loans or store accounts) can help you take advantage of unexpected opportunities that would have otherwise been prevented by lack of available funds. While they may help you in the short-term, fast cash fixes can bring problems of their own.

Cash flow is critical to the success of a small business, especially during the early years of operation. So when you’re in a tight spot having access to fast cash (through overdrafts, credit cards, pre-approved loans or store accounts) can help you take advantage of unexpected opportunities that would have otherwise been prevented by lack of available funds. While they may help you in the short-term, fast cash fixes can bring problems of their own. 

Today I’ll take you through what fast cash is and how you can avoid three common pitfalls that could hurt your business.

What is fast cash?

Any facility that either enables a cash injection, or defers a cash payment, is providing fast cash. While it may be convenient, fast cash should not form part of your debt management or function as a funding alternative and should be paid back as soon as possible.

With the plethora of responsibilities on many small business owners’ shoulders, fast cash fixes can quickly become cash gobblers. When assessing your cash flow, consider if the balance has grown on your credit cards and other short-term finance facilities. Or if the interest rates have increased significantly since you applied for the extra finance. Has the number of extensions taken you closer to 12 months since you were not running on the overdraft?

If quick cash flow fixes are being used frequently it is a sign of under-capitalisation, or loss making, and either debt or business management factors need to be re-considered and improved.

Three common pitfalls to avoid

1.  Minimise interest

Cash flow injection’s (fast cash) are generally unsecured and, as a trade-off for the lack of security, the cash usually comes at a higher interest rate.  Make sure you negotiate carefully, and check the terms and conditions before signing, to identify when, and how, interest rates can fluctuate.  Don’t let your cash flow boost become an interest monster!

2.  Minimise application fees and penalties

Most of these facilities have application fees (administrative overhead for processing your paperwork) but in many cases the admin fees and penalties are “loaded” to also cover some of the risk.  Before signing check the details of your agreement to ensure that you don’t have to pay a new application fee each month you have the facility, or for small changes to the repayment terms – I have seen facilities that penalize for early payments as well as late ones!

3.  Protect your credit rating

A healthy credit rating makes for easy business growth – so don’t use these facilities willy-nilly.  Understand that each facility and term will impact how you can borrow elsewhere.  Making sure you have the best mix of the right kinds of debt will keep your business healthy.

When was the last time you checked your fast cash for pitfalls? Share your ideas in the comments below.

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