By: Brandon Horvath
As EIDL payment deferment ends, business owners are looking at their bank accounts, readying to make the first payment on their pandemic relief loans.
Some borrowers are not comfortable with their current cash balances. Their businesses have not recovered as they hoped, causing a cash crunch.
Let’s take a look at how we got here.
EIDL Meant Survival
A pandemic swept the world, causing great stress on small businesses. The Small Business Administration responded by creating the COVID-19 Economic Injury Disaster Loan (EIDL).
Small business owners could apply for this government-provided loan, and the terms were favorable: 3.75% interest for 30 years with a 30-month payment deferment.
Starting in early 2020, borrowers accepted these funds. For many, EIDL was vital. Businesses used the loan proceeds to pay employees, meet obligations to landlords, and market their new ways of doing business. Some even used the funds to remain current with other creditors.
Many small businesses survived the pandemic in large part due to EIDL.
But now, the deferment period is coming to an end and small business owners are asking, “How will I make these payments?”
Cold Hard Cash Flow
These loans are not forgivable and must be repaid.
Looking at the current economy, EIDL debt is very attractive debt. The maturity term for the debt is long, and the rate is just over half of what today’s commercial loan rates are. Therefore, refinancing this debt is not advisable for the vast majority of borrowers.
The pandemic relief funding programs have ended, so Arkansas businesses can no longer look to them as available sources of cash.
Instead, small business owners concerned about making their EIDL payments should take a close look at the cash flow of their business.
In simple terms, cash flow refers to the day-to-day movement of money in to and out of the organization. A business that has positive short-term cash flow, on average, generates more cash on a daily basis than it spends.
For any business, this is a crucial component of success, both short term and long term.
How to Increase Cash to Pay Off Your Loan
Knowing where to start in improving cash flow is the hardest part. Day-to-day, there are often opportunities to become more efficient.
Here are four things you can do in the next seven days to improve your ability to service your EIDL debt.
1. Perform a Cash Flow Analysis
Analyzing your cash flow will help you determine exactly where you stand financially.
While this can feel like a daunting task, you can simplify this activity by simply making a list of daily sales transactions and daily expense transactions.
At the end of the day, you will be able to add both columns and compare the totals. Did you make more than you spent?
Once you master the daily and weekly cash flow activity, move on to analyzing your cash flow for a longer period of time: monthly, quarterly, annually.
When you know where you stand, you can compare yourself to your peers. Are you managing your business’s finances more efficiently than those within your same industry?
If you are challenged with generating more cash than you’re spending, consider limiting your spending to essentials needed to serve customers. Often, small business owners forget about small recurring expenses, which can add up quickly.
Additionally, take a look at the terms you provide your customers. Are your customers taking too long to pay for the goods and services your provided them?
Finally, cash flow management is often about the timing of when money comes in to your business and when it exits. Align your expense obligations with the inflow of cash.
By doing this, you may be able to restructure the flow of cash to become more comfortable and maintain healthy account balances.
2. Track Cash Flow Trends
As you continue monitoring your cash flow, keep a close eye on the internal and external factors that impact your small business.
Many small business owners love to compare historical performance to current performance. When they compare a day’s sales to their sales on the same day last year, they often are discouraged if there is a decline. But in doing this comparison, small business owners often times forget an important piece of the puzzle: identifying reasons for the increased or decreased performance.
For retailers, things beyond your control can play a large role in sales performance on a daily basis. For example, if we experience a record-breaking snow storm, a retailer may do a limited number of in-store sales for a few days.
When forecasting for the next year, business owners may not remember that snow storm and its impact. A small business owner that simply looks at the face-value data from the previous year may fail to keep sufficient inventory on hand or may staff inappropriately.
This can have a negative impact on cash flow if customers are unable to purchase the goods they are seeking.
Successful small business owners keep a narrative journal that accompanies the traditional financial statements. That journal explains the financial performance and is a crucial piece in helping them manage their cash flow.
3. Convert Assets to Cash
The most obvious way to generate cash from your company’s assets is to sell the inventory. After all, that is the goal for many companies – purchase goods and sell them at a profit.
However, most small business owners have other assets that do not contribute to their operations.
Take a look around your shop or your warehouse. Do you have extra furniture, fixtures, or equipment? If so, consider cleaning house and selling items. This activity can generate cash inflow that is helpful in servicing debt or building a larger safety net.
Another asset to examine closely is accounts receivable. Many business owners dread managing their billing. But it is important, especially in times of cash shortages.
To collect, you can take the do-it-yourself approach or hire a collections company.
In many cases, your customers are just as busy as you are and they have forgotten. Providing them a friendly reminder that they owe you a few dollars is all they need to pay their bill.
By looking closely at your accounts receivable, you may be able to generate a meaningful amount of cash to improve your business.
4. Communicate Early and Often
Finally, for as long as you own your business, you will need to communicate openly with your bank and creditors. Do not hide financial difficulties from them. They are invested in your business and are there to support you.
Being up-front about your situation will establish positive rapport with them. They may also be able to identify available resources of which you are unaware.
Demonstrate that you are on top of your business, even if that simply means knowing the degree of your financial challenges.
Improvement Over Time
These tips are not a magic solution to cash flow challenges. It will take time and effort to improve your standing and see positive results. However, starting with these activities will put you on the track towards success.
The Arkansas Small Business and Technology Development Center would love to assist you in managing your cash flow more effectively. For more information and additional resources on financial and other small business best practices, contact your local ASBTDC.