Life-saving measures for small businesses on the brink of closure

Life-Saving Measures for Small Businesses on the Brink of Closure

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No matter what part of the country you’re in, you have small business-owning neighbors struggling to keep the lights on. With erratic reopening plans, caseloads that still won’t decline, and the need for social distancing until there’s a widely-available vaccine, countless businesses have been hit hard.  But what can be done?  Are there any life-saving measures for small businesses on the brink of closure?

If you’re a business owner in this situation, you could find enough relief to keep your doors open and critical staff employed using one (or all) of the options below.

Review Your Expenses

While you might have already done this back in March, it might be time to review your expenses again.

Instead of eyeing luxury expenses this time around, put an eye toward ways to discontinue some low-margin services and supplies until traffic gets back to pre-pandemic levels again. This could mean paring-down your menu, hiring a delivery person instead of subcontracting to meal delivery services, liquidating inventory at a deep discount to reduce warehouse space, or even limiting workdays to the most profitable days and hours.

When evaluating expenses to cut, don’t think of these expenses as permanently on the chopping block. Instead, you can bring them back and build back up when life and revenue pick up speed once again.

Get Creative With Payment Arrangements

If you’re strapped for cash, your vendors may be as well. Reach out to your accounts payable and start a conversation about mutually-beneficial payment arrangements.

For example, if you can promise $X toward your invoice every two weeks, that’s better for your vendor than zero dollars. Your vendor gets a predictable cash flow, and you get a reasonable payment arrangement.

If you and a vendor do mutual business (they invoice you and you invoice them), set up a call for an invoice review. Explore creative options like applying their invoice for $1000 to your invoice for $800. You’ll still owe them $200, but it’s a lot better than $1000. This is a simple solution that often slips through the cracks because your AP and AR systems might not communicate with one another.

Explore SBA Loan Options

While the Paycheck Protection Program is no longer offered, there are three other SBA loan options you can explore for a much-needed cash infusion:

  • Economic Injury Disaster Loan (EIDL): If you’re experiencing a loss of revenue due to COVID-19, you could be eligible. Terms are 3.75% interest (fixed) for up to 30 years with no pre-payment penalty. You can even defer payments for up to one year (but interest will still accrue).
  • SBA Express Bridge Loan: If you have an existing relationship with an SBA lender, you may qualify for a loan up to $25,000. These loans can be regular term loans or bridge the gap between today and approval for your EIDL Loan. You just need to reach out to your existing SBA lender to inquire.
  • SBA Debt Relief: If you have an existing SBA loan and have trouble making payments due to COVID-related financial hardship, this program can bring you relief. Eligible loans include “7(a), 504, and Microloans in regular servicing status as well as new 7(a), 504, and Microloans disbursed prior to September 27, 2020” per the SBA. If you qualify, the SBA will pay any principal, interest, and fees on your loan for six months.

Have a Candid Conversation with Your Bank

Finally, it could pay to sit down and have a candid conversation with your bank. Your bank doesn’t want to lose your business or see you default on lines of credit or other loans. You could find they’re willing to work with you if they know your full financial picture.

There aren’t any guarantees that your bank could come through with funds or reprieves from payments due.  But, if you don’t start the conversation, you’ll never know what’s possible.

Have any other tips or advice on life-saving measures for small businesses?  Let us know.

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How to Stress Test Your Small Business

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In the banking world, advisors often talk about stress-testing portfolios — determining the effect of different scenarios on an individual’s or business’s holdings. The same should be done for a small business.

How prepared are you if the economy changes, and you need to dip into your reserves? How will you manage your cash flow? Do you, as a small business, have the resources to survive heavy losses if the worst-case scenario happens?

Here are six ways to help stress-test your business if there is a downturn in the economy.

1. Solicit advice from key advisors.

Do you have an advisory board or a brain trust of reliable partners? SCORE, a nonprofit that is a resource partner of the U.S. Small Business Administration, offers a network of volunteers including retired C-suite executives, who can help mentor.

Find your local chapter, which is typically done on a county by county basis, and attend a workshop or listen to a live or recorded webinar.

You can search for a SCORE mentor online or have the local chapter pair you with an expert who can help mentor you on your business goals. Some mentors bring in additional mentors to help with various aspects of your business, such as preparing for a potential downturn.

2. Create a plan for worst-case scenarios.

One of the more effective ways to prepare for a sluggish economy is to forecast trends. Look at what a dramatic drop in sales or a dramatic uptick in expenses might do to your business. Ask yourself what would happen if you lost a major vendor, product or service. What might this loss do to your company? Then decide where you could trim expenses, potentially increase profits or diversify your client-base.

3. Identify all your best customers.

Not all customers are created equally. That’s because some are more profitable than others. Once you’ve pinpointed who your best customers are, begin nurturing those relationships by continually adding value for them. Build brand loyalty for them by making sure it’s easy for them to do businesses with you. If a change in the economy affects your business, loyal, high-value customers may help sustain you until the market changes.

4. Review your financial cushioning.

Although the general recommendation for businesses has been six months, Hal Shelton, a SCORE mentor and angel investor says to look at how much you cash you need. Ask yourself these key questions:

  • How much cash have you been using?

Look at your “net burn rate,” the rate at which you spend your cash holdings. For example, if you are bringing in $10,000 but you are spending $4,000 in expenses, your net burn rate is $6,000

  • How much cash do you plan on using in the next 12-to-15 months?

Be conservative, but look at your monthly budget or the financial forecast in your business plan. Separately, look at actual cash expenditures as well as the cash in (sales) and cash out (expenditures).

  • What stage is your business?

If you’re a start-up, or ramping up your business and going to have big expenditures, that’s different than being in the middle of a more-established place.

  • How long will it take you to get more cash?

For many businesses, this is an unknown factor. Getting a loan from a bank, if they are willing to lend, can take several months. It usually takes at least a month to find a bank who might be willing to lend money and another month to fill out the paperwork. That’s contingent on already having a bank-ready business plan and an already established relationship.Shelton says pitching and presenting to potential angel investors takes significantly longer, usually at least six months or possibly nine months to a year.

5. Consider your borrowing options.

You don’t want to have to borrow money when you desperately need it. You want to borrow money before you anticipate you might need it, or at least have a good enough financial footing to be able to secure a line of credit or a business loan. Stephen L. Nelson a CPA in Redmond, Washington, offers some tips on how to forecast 12 months out using excel workbooks.

Shelton’s advice is to “Seek cash when you are in a position to explore options and negotiate from strength.” Then ask yourself: Can you still operate if your funding disappears?

6. Consider alternative funding options.

Besides traditional term loans, you may consider opening a business credit card or a business line of credit. There’s also equipment financing and grants for small business owners. If you have less than perfect credit or if you need money quickly as a business owner, a short-term loan may you be your best option.

By stress-testing your business’s finances and proactively planning now, you may help mitigate potential problems down the line.

too much inventory

How to Handle Orders without the Danger of Too Much Inventory

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You need inventory to fill orders, so having plenty of everything on hand might seem smart. There would never be a stockout and closing sales would be as easy as sending someone to the warehouse. But maintaining too much inventory may undermine your business.

Holding considerable inventory can force you to hold more product than is necessary. What you might consider, instead, is only stocking the amount of merchandise you need, and the inventory turns ratio (ITR) can help you find the inventory levels for your business.

Availability is good, but has a cost

High availability means buying, carrying, and storing a lot of product. Inventory costs money, so you end up using capital that could otherwise help grow and sustain the company. Too much money in inventory can also affect your need to finance and how much you might need.

And there are other problems: Inventory ages, not only on the books, but on the shelves. You may have products fall out of support, become discontinued, get damaged, or otherwise lose value. Then there’s the cost of storage space and increased headcount to manage the additional product.

This all adds up to money your business will have to spend on maintaining a constantly full inventory level.

Increasing inventory turns

Instead of more inventory, consider replenishing stock more frequently. So long as there are enough products on the shelf to satisfy orders that will come in until the next delivery, you can keep customers happy and reduce costs.

This is why you need to look at the ITR. ITR shows how frequently you replace stock over a given period – such as each month, each quarter or each year.

Calculate inventory turns by dividing the cost of goods for the sales you make in a period by the value of your average inventory over the same period.

The idea is to push inventory turns as high as you can to make better use of that inventory.

Setting the right turns level

Finding the right ITR can be a challenge. If you drive turns too high, you may miss filling orders in a timely basis because you don’t have the products you need. Too low, and it means cash is locked up.

Balance inventory turns with sales, vendor stock availability, supplier reliability, and minimum order sizes. Sales fluctuations like seasonality or outsized importance of certain products can also make it tougher to monitor and control ITR. Arrival of new stock in a timely manner becomes more critical.

There is no magic way to know what ITR will be right for your company, but understanding how ITRs work may help you test stock levels and optimize for your operations.

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