Cash flow can make or break a small to mid-sized business. Alternative funding sources can help

By Abigail Czinege – Director of Strategic Advancement 

Small to mid-sized businesses (SMBs) make up 99.9% of enterprises in the U.S., according to a report by ForwardAI, and the majority (a reported 60%) of those businesses fail due to poorly managed cash flow. It’s a challenge businesses face on a global scale, and providing SMB owners with more sustainable funding solutions begins with educating partners and local businesses on effective cash flow management and available alternatives.

Cash flow forecasting

A month into the new year, many companies have just completed or are in the process of budgeting for 2023. Timing and planning are vital to prepping successful cash flow. “Cash flow forecasts provide business leaders with important insight about likely changes in a company’s cash position and are a critical tool for charting a successful course to the future,” according to Kristina Russo, professional CPA and independent writer.

What some businesses forget to consider is how to manage their cash flow for projected growth. Forecasting allows SMBs to recognize periods of negative cash flow and identify when supplemental sources of cash will be needed. It also reduces the likelihood of missing supplier payments and payroll, keeping partners and employees happy. Seasonal businesses consistently have a need for extra cash to build inventory or hire additional help – cash flow forecasting allows leaders to be proactive and find a healthy balance between accounts payable and accounts receivable.

According to Russo, “Companies without a sustainable positive cash flow typically go out of business. Cash flow forecasts provide early warning signs of potential cash shortfalls so that a company can change course before it’s too late.”

Rising interest rates and the aftermath of COVID-19 make traditional financing a harder sell

According to the ForwardAI report, SMBs struggle to get approval for traditional financing. In fact, 38% of businesses with revenue less than $5 million are approved for bank loans and the latest Biz2Credit Small Business Lending Index found that in June 2022, only 15.4% of loan applications at big banks and 21.1% at small banks were approved. These numbers are much lower than the pre-pandemic lending figures from February of 2020 when big bank approval rates hit an all-time Index high of 28.3% at big banks and when lending percentages were greater than half (50.3%) for small banks.

Still grappling with the effects of the pandemic, small businesses are also finding it tough to receive traditional financing. But even in pre-COVID-19 times, a small business lacked the proven credit history for banks to approve; COVID-19 has only made circumstances worse, with traditional loan applicants becoming more likely to get turned down or receive less money than they asked for.

Minority-owned and women-owned businesses continue to be hit the hardest and were already at a disadvantage in trying to secure capital. “It is harder for them to secure small business loans and often they pay higher interest rates when they do borrow,” according to Rohit Arora, senior contributor to Forbes. “Interest rate hikes impact small business owners significantly, as the cost of capital will go up from all types of lenders, including big banks and the regional and community banks that make a large percentage of the SBA’s 7(a) loan program.”

Alternative funding solutions are available and primed to impact SMB growth

While cash flow is a major concern, there are other solutions to strengthen your capital. Alternative sources of funding, such as factoring or funding invoices, will be critical to meeting the needs of SMBs.

These programs pave a way for companies to quickly and seamlessly receive additional capital to maximize their potential, strengthen their supply chain, improve supplier and vendor relationships and earn additional profit through revenue sharing. Companies have the opportunity to prepare for seasonal fluctuations and unpredictable payment cycles; or eliminate payment cycles that last 30, 60 or even 90 days without going through the hassle and rigid process of traditional loans.

With more cash flow on hand, the ForwardAI study showed that 33% would purchase more inventory or equipment; 28% would expand operations, such as exporting to new markets or opening new locations; 16% would use it to meet current obligations; 10% would invest in employees through hiring, wages and benefits; 9% would put the funds into research and development; and 4% would create contingency plans to deal with unexpected events.

The bottom line is that alternative funding solutions give SMBs the breathing room to scale their business by using the additional capital for the areas that serve their best interest. Because when it comes to cash flow management determining the success of your business, the stakes are high.

Abigail Czinege is the director of strategic advancement at Kompass Funding, focusing on growing and advancing business within sales, marketing and corporate strategy.  

This article originally appeared in The Kansas City Business Journal.