This article was written by Nate Matherson of LendEdu.
While we would all like to build companies that pull in money at the same high rate every month of the year, every business has certain degree of seasonality.
That’s especially true for my company LendEDU, which started as an online marketplace for student loans. This meant that we had more money coming in during the months of June, July, August and September when people were applying for student loans for the fall term and then again in January and February when students were applying for loans for the winter term.
Our company has since branched out to be a marketplace for all kinds of financial products, in part to create a steadier income stream. But when we were focused on student loans, we had to get creative when it came to our cash flow during our lean seasons. After all, we didn’t want to go to investors every time we needed money since that would mean diluting our equity. Instead, we found creative ways to maintain steady cash flow.
Here are some strategies that helped us survive our lean seasons:
1. Get Customers to Prepay You
Your company may be struggling with cash flow and you may likely be waiting until the last minute to pay the invoices you owe money on, it might seem absurd to expect your customers to give you cash before they have to. But not every company has their lean season at the same time and some companies might have more working capital. There are also ways to incentivize early or prepayment.
The first way is to ask for a deposit up front on your services or goods. This deposit can be as little as 20% or as much as 100%. If it’s not typical to require deposits in your industry, you might want to choose a smaller deposit amount.
Another way to incentivize pre-payment is to give your customers a discount if they pay early. Since your alternative solution to your cash flow issues would likely be to borrow money and pay interest on those business loans, discounting an invoice 2% to 5% for early payment would allow you to still come out ahead. You could also work this discount into your pricing strategy.
2. Invoice Financing
Do you have a bunch of invoices that you’re waiting to be paid, but no cash to make payroll? Invoice financing allows you to get short-term loans against your invoices.
While this can save you if you’re desperate for cash but you you have bad credit or otherwise cannot qualify for a loan, it won’t come cheap.
Generally, invoice factoring companies charge anywhere from 2% to 5% for a 30-day loan. That doesn’t seem to be a lot, but that’s actually 24% to 60% APR.
There are also exploitative invoice factoring companies that will charge you even more which you’ll want to avoid.
Ultimately, you could be better off using a line of credit or a credit card to cover your costs. But if you can’t qualify for one or you have maxed yours out, invoice financing could be a great last minute option.
3. Avoid Your Customers Paying You Late
We’ve all been there – desperately waiting for a payment that doesn’t come on time. What can you do to encourage your clients to pay you within the terms you’ve agreed on?
If they’re a new client, it makes sense to check in with them around what’s needed from you when you submit your invoice. The last thing you want is to find out that you had to fill our paperwork to get set up in their payment system and that they haven’t even started to process your payment yet.
The next thing you can do to avoid customers paying you late is to charge a late payment penalty. If you have both a discount for paying on time and a late payment penalty, then you’re doubly incentivizing companies to pay you in a timely manner.
Another way to prevent late payments is to break up large invoices or require partial payments after certain milestones are met on big projects. This will ensure you have regular money coming in instead of money coming in only after a project is completed.
Finally, one way to ensure invoices are paid on time is to adopt a cash-on-delivery policy. This means that your customers won’t receive the goods or services until they’ve paid their invoice. This can be a difficult stance to take if it’s not common in your industry, but if you do good work or if your company is relatively new some of your clients might be willing to agree to these terms.
In fact, more established companies can sometimes understand the struggles of smaller companies have in terms of cash flow and you don’t know whether a company would be willing to change their payment terms unless you ask.
Why Non-Dilutive is Better
Getting the money you need without having to give up any more ownership of your business is a key way to ensure that you’re able to benefit from your hard work. These few simple tweaks and strategies to help you improve your cash flow will likely be all your business needs to stay on top of your expenses during your lean season.