Business loans can provide critical financing to help companies grow and expand. However, if cash flow is not properly managed, businesses can struggle to make loan payments on time, leading to default. Defaulting on a business loan can have severe consequences like legal action, bankruptcy, and closure. That’s why it’s so important for companies to closely monitor their cash flow and take steps to avoid falling behind on payments.
Cash flow refers to the amount of money moving in and out of a business. It represents the actual amount of cash available to a company for paying expenses, debts, and funding operations. Even profitable businesses can experience cash flow problems if they don’t have enough liquid funds to cover short-term debts and obligations.
Some common reasons businesses struggle with cash flow include:
Carefully tracking both incoming and outgoing cash transactions is crucial. Some ways to monitor cash flow include producing cash flow statements, keeping detailed financial records, and comparing projected sales and expenses to actual figures.
“One of the biggest mistakes I see business owners make is not paying close enough attention to their cash flow. They get caught up in the day-to-day operations and neglect their finances until it reaches a crisis point.” – Reddit user CommercialLoanManager
If a business misses too many loan payments, the lender can declare the loan in default. This triggers the loan’s default provisions, allowing lenders to take actions like:
Many small businesses don’t survive defaulting on loans. The legal fees, lawsuits, higher payments, and hits to their credit make it extremely difficult to recover. Default can also impact the business owner’s personal credit score if they personally guaranteed the loan.
“I’ve seen perfectly decent businesses go under because they waited too long to address their cash problems and got buried in penalties, legal fees, and high-interest payments they couldn’t keep up with,” one Redditor advised. “Don’t let pride or fear prevent you from being proactive.”
Because falling behind on payments can jeopardize an entire business, improving cash management needs to become a top priority. Here are some tips for better managing cash flow to avoid ending up in default:
Building up a cash reserve is vital to cope with financial surprises. Experts recommend having at least 3-6 months of operating expenses available in cash. Emergency funds prevent needing to miss payments when the unexpected occurs.
Many cash flow issues can be avoided through faster, more efficient invoicing. Sending out invoices quickly, automating reminders for past due invoices, and accepting online payments can improve cash flow by getting revenue in the door faster. Evaluate if any inefficiencies in the billing and collections process can be improved.
While getting paid faster is ideal, it’s equally important to delay outgoing payments without incurring penalties or hurting the business’s credit. Paying vendors and bills more slowly or staggering payments across two-week or monthly cycles helps reserve cash longer before it goes back out the door.
Lines of credit or credit cards specifically designed for funding short-term business expenses can inject needed cash. By using credit selectively for things like monthly operational expenses or inventory purchases, cash can be preserved for long-term, fixed expenses like loan payments.
If a cash crunch won’t be easily resolved before payments come due, the business should immediately contact their lender. Many lenders are willing to temporarily lower monthly payments, offer smaller partial payments, or defer a month of payments altogether to help borrowers get back on track. Waiting until after default occurs eliminates these options.
There are lending products like merchant cash advances that can quickly deliver extra funding to bridge cash flow gaps. While expensive, for businesses already struggling to make ends meet, the higher cost may be less damaging than default.
Businesses should scour their budgets for any non-essential expenses that can be reduced or eliminated, even temporarily. Things like high-cost vendors, software subscriptions, inventory, and staffing should be evaluated. Travel, office perks, and marketing are also common areas where budgets can often be trimmed.
Even with the best cash management, some businesses still end up in default if an unexpected emergency or slow season pushes them over the edge. In these cases, working earnestly and cooperatively with lenders presents the only chance for resolving the situation without forcing bankruptcy or closure.
If default occurs, businesses should:
Recovering from a default is daunting but staying the course and demonstrating consistent payments over time can ultimately repair damaged credit and lender relationships.
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