What if a business has less than a 90-day runway?
Finding immediate and emergency solutions for cash flow issues.
What would you do if you woke up and found out that your business has less than three months left to live?
It’s every business owner’s worst nightmare. When a business is running out of runway and it’s a matter of “take off” or “crash”, what should you do?
In this article, we’ll answer important topics like:
- What if a business has less than a 90-day runway?
- Understanding Line of Credit and Alternate Financing
- Understanding Current Government Programs
So, let’s find out exactly what you should do when a business has less than 90 days of runway left.
What if a business has less than a 90-day runway?
In simple terms, this means that the business has enough cash flow to sustain operations for less than 90 days.
If the business can’t afford to pay employees, employees start leaving. If a business can’t afford to pay rent, the landlord can kick the business out. And while the business may be owed large sums of money, if it doesn’t have savings or cash on hand to cover the day-to-day expenses, the business may close before these payments even arrive.
Poor cash flow is the number one reason for small businesses’ failures.
However, there are a few options we recommend to start cutting expenses and/or improving cash flow in the short term:
- Take a salary cut or reduce your headcount via furlough
- Consider raising money or taking on a loan
- Consider taking on a business partner
- Finance your invoices or purchase orders
- Talk to friends or family about investing
While these options are not ideal, having to close your business is even less ideal, so essentially, these are better than nothing.
What option(s) you choose will depend on how comfortable you are with risk, as well as additional factors that may impact your business/financial standing.
Understanding Line of Credit and Alternate Financing
Taking out a line of credit to cover current or upcoming debts can be a good option if you know you’ll be able to pay it back. For example, if there are invoices or purchase orders that are waiting on payments and you know for a fact that these invoices will be paid, then a line of credit could be a good idea.
If a business has no sales and takes on a line of credit, they’re adding insult to injury as it will not be able to pay it back.
The same goes for financing invoices or purchase orders. If you have outstanding invoices or purchase orders in Accounts Receivable, you can take on financing against these invoices, and instead of waiting 30-90 days for payment, you can receive funds in advance.
When the customer pays the invoice the financing is also paid back. This is called refactoring.
Purchase order financing is similar but only applicable to companies that sell goods (not manufacturing). Financing an order allows you to pay your supplier, receive the goods to sell, and repay them once the goods have been purchased.
Understanding Current Government Programs
Currently, there are a number of Government Programs available to help small businesses that are struggling because of the economic climate.
If you need less than $50K you can consider a microloan, which is often easier than the option to finance your business. These loans are easier to get for businesses that are not well-established or do not have many assets to use as collateral.
Depending on who provides your microloan, the interest rates can also be significantly less than lines of credit or financing.
These are just a few of the options available to business owners with less than 90 days of runway remaining. Of course, you can always ask friends or family to help support your business, but you should make sure you’ll be able to pay them back, or else it could put a strain on your relationships. ---
If you feel you could benefit from a practical and experienced fractional CFO, please contact us to set up a time to discuss what you would like to accomplish within your business and a plan to get you there.