Starting a small business is always a gamble, but there are things that entrepreneurs can do to mitigate that risk. Completely preventable problems with cash flow, overspending and a shallow cash reserve can disrupt and even topple the most promising company. To secure against that kind of collapse, owners must ensure they establish a safety net for their small businesses.
The importance of a cash reserve
No matter how sharp your business plan is or how groundbreaking you believe your service or product to be, you’ll need to establish and maintain a solid cash reserve if you want your company to survive its first year of business. You need to make sure your day-to-day costs are covered and that any unforeseen hiccups, such as a major client dragging their heels on settling a large invoice, can be weathered while not impacting continuity of service. You should also be aware, regardless of what industry you’re in, that your company may encounter an extended period of stagnation. For your company to survive a protracted slowdown, the U.S. Small Business Administration recommends maintaining a cash reserve that can cover three to six months of operating expenses.
With a few successful quarters under their belt, some inexperienced entrepreneurs feel the need to expand in hopes of accommodating a demand that may not exist. Just because your third wave coffee shop or app-based delivery service is doing steady business, does not mean you should purchase a new location or go on a hiring binge. As this Entrepreneur piece points out, investing in an unsustainable infrastructure can kill an industry leading business with remarkable speed. If you’re fortunate enough to have a sudden infusion of cash, that money should go one of two places — a reserve that can be pulled from during a slowdown or into your investors’ pockets. Doing anything else with that money is effectively betting the house on red.
Maintain a line of credit
In a perfect world, you should have a secured line of credit available to you before you ever go to market. If for whatever reason that isn’t the case, you should look into getting a business credit line as soon as possible. While big banks are no longer interested in issuing small business loans in the volume that they once did, online lenders like On Deck and Kabbage have enjoyed huge success by providing small business owners with stopgap funding. Lenders can also make funds available to you one business day after your loan application is approved, as opposed to getting a credit line through a bank.
This article was written by Mario McKellop for Small Business Pulse