So you’ve started your own company. Congratulations! Here’s a little advice if you are starting out:
1. Cash is King. It doesn’t matter how many customers you have, if they don’t pay you in a timely manner, you may not be able to pay your bills. According to the Small Business Administration, half of all start-ups fail within their first five years, primarily because they run out of cash.
2. Income is lumpy, expenses are not. Rent, payroll, taxes, utilities, loan payments and credit card bills come due regular as clockwork. Creditors just want to get paid. They don’t want to hear your sob story. Income, on the other hand, often ebbs and flows – with the beginning, or end of a project, or a big sales order. And unlike retail businesses, which are generally paid at the point of sale, or on, or before, the service delivery date, commercial enterprises are generally at the mercy of their customers’ pay practices.
3. Big customers can take the longest to pay. Landing a big contract – with a big company or a governmental agency – is a double-edged sword. On the one hand, it speaks well of your business that you could land such a big order. On the other, fulfilling that order may tie up your cash resources for 30, 60 or even 90 days, depending on that customer’s accounts receivable policy. The larger the organization, generally, the more regimented its payment practices. If you’re going to take on a big order, you’d better be sure you have enough cash to tide you over until your big customer pays.
4. Banks Can Only Do So Much. It’s hard to overestimate the value of a strong banking relationship. But there comes that awkward moment in the life of every start-up, when your banker has to give you the sad eyes and tell you no. This isn’t the end of the world. You have other options.
5. You can’t pay the rent on a credit card. Credit cards are great for small purchases, but for most of your big expenses, you’re going to need money in your checking account.
6. There’s an easy way to get cash faster, without borrowing. It’s called invoice factoring – transforming customer invoices to cash. You don’t even have to have good credit. It’s the customer’s payment history that matters. There aren’t any closing costs, because it’s not a loan. And you can get cash within 24 hours.
These are things you probably wouldn’t know unless you own your own business, and for many the knowledge, especially number six (6), comes only through hard-won experience. Hopefully, this information will help you avoid trouble, by ensuring that your cash pipeline is as reliable as your products and services.