How to Pull Your Small Business Out of a Cash Crunch

You're working around the clock. So why are you short of cash? For a lot of self-employed people and small business owners, the answer is poor cash flow. Even if you're making a great living on an annual basis, there may be periods where the money flowing into your business slows to a trickle.

Fortunately, there's a lot you can do to prevent a cash crunch and get out of one if you're short of funds. Here are the steps you can take.

Vet clients carefully

We all love making sales, but closing a deal is only helpful to your business if you can collect the money you've earned in a reasonable period. If someone wants to hire you for a big project, suggest working on a small project together first and then build from there.

Use the small project to test how quickly the client pays you. If someone takes 90 or 120 days to close a $500 invoice, imagine how long it will take to get paid for a $10,000 gig. You may be better off working for another client, instead. Your bills are generally going to be due monthly and there's no way around that. (See also: 8 Ways Freelancers Can Make Sure They Get Paid on Time)

Diversify your client base

If you are a contractor dependent on just one client, you're very vulnerable to a cash crunch if something goes wrong in the payment process. Should that client hit a slump and postpone paying you, it will be easy to run out of money. "If you want them to pay you on time, you're at their mercy," says Bob Shoyet, CFO of Melillo Consulting in Somerset, New Jersey.

Although you don't want to spread yourself too thin, adding just a few more clients will give you income security you don't have with just one or two.

Let a third party handle client payments

Another way to reduce the risk of late payments is to onboard some of your clients to a freelance platform such as Upwork. Although Upwork will take a cut in your pay, it offers options for you to get paid for completed projects every Wednesday, twice a month, monthly, or quarterly — and takes on the task of collecting the payments from your clients.

Another option is, which offers a feature called the Milestone Payment System. It requires clients to pay you at predetermined points as you hit certain project goals. Payments are made securely within the site, which can be a benefit too if you're worried about checks getting lost in the mail.

Negotiate contracts carefully

Ask for a substantial deposit on projects upfront with progress payments along the way if this is customary in your industry — rather than billing for the whole project on the back end. If you do retainer work, invoice for payment at the beginning of the month, rather than at the end, with a due date of a week or 10 days after that. Very small businesses really aren't in the position to finance projects for their clients, so make sure you're doing that as little as possible.

If you work in a field where it's not common to ask for a deposit and clients tend to take more than 30 days to pay — as is often the case with big companies — consider offering them a discount if they pay you early. "Companies do take that into consideration," says Shoyet.

Some of my own freelance clients require vendors to use an electronic payment system called Coupa to submit invoices. They have set up their accounts so vendors can access a pulldown menu that includes an option to offer a discount if the client pays earlier than the standard 60 days.

If you do offer a discount, make sure to record the dollar amount of the discount as an expense in your accounting software, Shoyet says. (See also: 5 Ways to Build Business Credit When You're Self-Employed)

Finish projects on time

Getting into a situation where you have a lot of projects that are in the middle of the completion process and not many that are finished can lead to long periods where you can't submit many invoices — and have little money coming in later. When you're planning your weekly schedule, look for ways to bring as many projects as possible to the finish line while still doing a great job. Even finishing a few small projects can give you a lifeline. The more quickly you finish a project, the sooner you can send an invoice.

Stay on top of invoicing

When you offer 30-day payment terms to a client, the 30 days start when you send the invoice. If you're routinely waiting a week or two after completing a project to invoice, you'll be postponing the day you get paid.

No matter how busy you are, set aside at least an hour or two a week to submit invoices so you don't fall behind. If you just can't find the time, consider hiring a bookkeeper to help you keep your books and submit invoices for you. A very small business should not require more than a few hours of help a month, and this modest investment could save you from having to borrow later. (See also: 5 Free Accounting Tools for Freelancers)

If your clients are willing to pay you electronically, that can speed up payments. The popular accounting software programs QuickBooks and FreshBooks let you accept both ACH payments and credit card payments. I prefer to use ACH to avoid credit card processing fees, which can add up on large projects. But if you're working with a client who may have cash flow issues, paying the credit card fee may be a good investment in protection against receiving a seriously late project payment.

Follow up

Sometimes, when I've checked on an unpaid invoice, I find out it has been lost in a client's inbox. The sooner you figure out that this happened — and follow up in a cheerful manner — the better.

If you send your invoice as a link from QuickBooks or FreshBooks, you can see whether an invoice was "viewed." Sent it as a PDF? Use your email functions to see if the email was read. If an invoice was not viewed, mention to your client that it's showing up as "unread" and ask if he or she would prefer that you send it in another format. There might be an issue that is causing it to get lost in Inboxland and hold up your payment.

Put a safety net in place

Make sure you have at least one credit card for your business and, ideally, a line of credit with your bank, too. You don't have to use them, but it's good to have them set up for an emergency — particularly if have a payroll for your business. If your credit is good and you are not maxed out on debt, many banks can help you get a business credit card quickly. (See also: 10 Smart Ways to Get a Small Business Loan)

Know where to turn for quick cash

What if you're in a crunch now? Make one last attempt to collect seriously late invoices that you've just about given up on. Try reaching out to the company's accounts payable team, instead of your original contact.

Also consider putting your receivables to work for you. Fundbox, one service that has been picking up traction, will allow you to borrow up to $100,000 against your receivables and repay the loan over 12 or 24 weeks. To work with Fundbox, you need to use one of the invoicing platforms the company works with — Clio, eBillity, FreshBooks, Harvest, InvoiceASAP, Kashoo, Jobber, PayPal, QuickBooks, Sage One, Xero, and Zoho.

Borrowing this way isn't cheap, but if you have urgent bills to pay or need to make payroll, it may be necessary. Then, once you're out of your crisis, take some time to put better systems in place so the cash starts flowing more evenly. You'll enjoy your business a lot more that way.

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