Business need to be able to fund their operating costs, and if work is slow, a business must do all that they can to retain key employees, market their business and pay their bills. Falling behind on financial responsibilities will cause a business’ operations to come to a halt quickly.
Operating expenses will include day-to-day costs, such as:
- Professional services
Businesses have several ways to help fund their business operating costs when work is slow or they’re waiting on a major invoice to be paid.
Cash is Often a Last Resort
The biggest businesses in the world carry debt, and it’s not because they don’t have money to pay all of their expenses. Cash is meant to help with growth, and a lot of these companies will make acquisitions using cash while also carrying debt for other expenses.
Businesses should have cash on-hand to cover operating expenses, but dipping into cash reserves limits growth potential.
So, if constantly dipping into savings isn’t ideal, what can be done?
Designate a cash reserve specifically for operating expenses. Once depleted, you’ll want to move on to other forms of funding your operating expenses.
Invoice Factoring is an Option
Invoice factoring is one way to ensure that you can pay for your operating costs when pending invoices keep your business stagnant. The way this method of funding works is that you’ll essentially “sell” your invoice to another company at a discount.
The other company will give you cash for the invoice, so they may provide 80% of the invoice.
You may also receive a percentage of the recovered funds from the invoices, too. This offsets your invoices, puts them on the lender, and helps you keep operations running.
While you’ll lose some money from invoice factoring, you’ll still be forfeiting up to 20% of the money owed to the business.
Line of Credit
Businesses should keep a revolving line of credit open. These lines of credit can be used, repaid and used again without having to go through the approval of a loan again. For example, a business can have a $100,000 line of credit open that can be utilized to pay $50,000 this month in expenses.
And six months down the line, even if you have paid back the line of credit, you can take out money from the line of credit again.
It’s a revolving line of credit that can be used as long as the line of credit remains extended to the business.
Credit cards are unsecured, so they differ from lines of credit in a few ways. Credit cards have:
- Lower overall credit extended
- Higher interest rates
But credit cards give businesses more flexibility. Businesses should maintain a health credit history and ensure that they have credit cards available for unexpected expenses. The only issue with using a credit card for operating expenses is that credit cards don’t have high limits in many cases – or a limit high enough to cover operating expenses.
It’s important for a business to use credit cards as a last resort if a line of credit is available, as a line of credit is more economical and offers lower interest rates.
Filed under: Life