Cash is king in the business world, which can be somewhat problematic for small business owners who aren’t always as liquid as they’d like to be. While one late payment from a customer might not be a big problem, multiple delinquent invoices can cause major cash flow problems and seriously disrupt your ability to continue operating.
Late payments: A sensitive problem for customer-centric businesses
When you enter into a business relationship with a client – whether for a long-term project or an immediate sale of a physical good – there’s an assumption that you’ll provide the product and the customer will pay for it within the agreed upon timeframe. The problem is that it doesn’t always work out this way.
For one reason or another, customers have been known to pay late. In most cases, a late payment is nothing more than a minor annoyance. However, too many late payments – or one large, untimely late payment – can spell disaster for a business with a tight budget and very little room for error.
As a customer-centric business that prioritizes healthy relationships with its customers, you have to be careful with how you proceed. On the one hand, you really need to collect on your invoices in order to keep your business operational. On the other hand, you don’t want to press too hard and ruin the relationship/reputation you have with your customer base.
After reaching out a few times and asking politely for payment, you can kick things up a notch and be a little sterner. But you’ll eventually reach a point where you can’t get much more forceful without coming across as rude and offensive. And it’s here where you really need a better solution.
Why you should consider a working capital loan
Every now and then you’ll run across a client who simply won’t pay. In these situations, you have to run a cost analysis of a potential lawsuit and determine whether it’s best to cut ties or pursue legal action. But in the vast majority of cases, late invoices will be paid. It’s just a matter of when. However, in the meantime – as you wait – you need cash. This is where a working capital loan – i.e. your safety net – comes into play.
As you’re probably aware, working capital is the cash your company has on hand to handle short-term operational needs – such as payroll and everyday business expenses. When payments are late, you might find that you’re short on working capital. A working capital loan can help you out.
"The immediate benefit of a working capital loan is that it's quick and lets business owners efficiently cover any gaps in working capital expenditures,” Investopedia explains. “In addition to the speed, the other noticeable benefit is that it's debt financing and does not require an equity transaction, meaning that a business owner maintains full control of his company, even if the financing need is dire.”
Why not just get a standard loan, you may ask? For starters, almost any business can find working capital. Even if you have a poor credit score – around 500 – you need just $50,000 in annual profit to be considered by lenders. If you have a higher credit score – above 600 – you typically only need to bring in $25,000 annually.
Get your business on the right track
With a working capital loan, you have the cash you need to maintain daily operations, regardless of the circumstances. As a result, you can continue to gently push clients to make payments. However, you don’t have to get overly aggressive and risk your reputation.
On-time payments are always preferred, but working capital loans can help you maintain when late payments are an issue.