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Whether you are running a tech startup, an app or the next best thing to solve world hunger, pretty much every startup relies on having a strong and stable cash flow.
However, with more than 50% of startups failing by their fifth year and 82% of these allegedly failing due to a lack of cash, we look at some of the options that can offer startups a quick injection of cash when they need it.
Ruling out other long-term cash options
With most traditional startups, you might look at institutional funding options from the likes of banks, VCs or even grants. The only issue is that these can take a long time to materialize and do not exactly help if you are quickly running out of money and need to pay licenses or staff wages.
So while VC funding and financing through accelerators or institutions are strong and stable ways to access long-term startup money, we want to look at more immediate options.
Credit facilities and overdrafts
For any personal or business credit cards, you should usually have the option to use your overdraft for emergency funds.
“However,” as Ben Sweiry of Dime Alley explains, “ it is noted that this can be some of the most expensive borrowing out there and it should not be used as a long-term solution to cash flow problems.”
“If you are using credit that you have access to from your personal account, you may have to write this down as a personal loan to the business. Your personal and business accounts should not overlap too frequently and you will need to account for this.”
Use factoring or accounts receivables
If you are struggling with cash flow due to pending payments, there are a lot of good options in the form of invoice factoring or accounts receivable. This essentially offers a way to receive a large sum of money upfront on a potential order, whether you have a contract confirming the purchase price or you have a number of large invoices outstanding.
“You are essentially using your invoice as collateral,” explains Richard Dent of online lender DollarHand. “The invoice lenders will verify that your invoice and contract exists with the vendor and on this basis, they can fund up to 90% of its value, often within 24 to 48 hours, which is perfect for urgent cash requirements.”
“This type of finance is very popular for small businesses, especially fashion companies, construction firms and those moving consumer products.”
Do you have any assets?
In addition to invoices or accounts receivable, you may look at what other assets that you could potentially borrow against, either as a business or an individual.
For businesses that own inventory, premises and vehicles, these are all things that could be used as collateral for a secured loan. When borrowing, you are handing over part-ownership of these assets to the lender and then you own them again once your loan has been paid back. This can be a good way to borrow large sums, but failing to keep up with payments can lead to repossession of valuable items.
On a personal level, you always have the option to leverage your car in the form of a title loan, or borrow against your home as a secured loan. These both come with risks, since using money for a high-risk startup and failing to pay off the loan could result in losing your home or car. Try telling that to your wife!
Hey, it might have worked for Apple and McDonalds, but you will definitely need to weigh up the potential risks.
Avoid high-cost loans
The lure of high-cost loans and payday products is always very attractive, but they are not well suited for startups. With APRs often carrying more than 300% or 500%, these products are better suited for one-off family or household emergencies and not for building an exciting tech business.
Cash flow management is vital for any startup, but exploring your finance options both short-term and long-term and staying on top of this are crucial for success.