Leading invoice funding company Charter Capital says small businesses across the country are days or weeks away from a liquidity crisis, and that prevention measures and initial responses may determine long-term business outcomes. Additional insights are presented in “Liquidity Crash Kit: 5-Step Cash Crisis Management Strategy,” now available at CharCap.com.

“Businesses can often overcome financial emergencies by responding swiftly and prioritizing long-term outcomes,” said Joel Rosenthal, co-founder and executive manager at Charter Capital.

Many small businesses are in a precarious liquidity position

While the majority of small businesses struggle with cash flow issues, a large subset is in an especially precarious position because of limited reserves and debt, which increase the risk of insolvency. In that environment, even a short disruption in receivables or an unexpected expense can force owners to make immediate decisions about payroll, vendors, and customer commitments.

• Limited reserves: 39 percent of small businesses cannot cover one month of expenses in an emergency.
• Liquidity shrinking: 23 percent expect their reserves to shrink in the next year.
• Debt often leveraged: 86 percent regularly use financing.
• Trapped by debt: 33 percent report difficulty making debt or interest payments.

“It’s well documented that cash flow management issues are present in the majority of small business failures,” Rosenthal said. “However, businesses can often overcome financial emergencies by responding swiftly and prioritizing long-term outcomes.”

The first hours of a liquidity crisis can shape the outcome

Rosenthal said businesses can address many underlying issues in advance to prevent liquidity problems or reduce their impact. But when an emergency occurs, the steps taken in the first few hours can dramatically affect long-term outcomes. That makes preparation useful not only for avoiding a crisis, but also for shortening the time it takes to respond if one starts.

• Limit the snowball effect: What begins as a temporary liquidity crisis can quickly lead to bounced checks, fees, and a loss of trust, all of which can have lasting consequences. Businesses should confirm their cash position and pause all nonessential spending as soon as a shortfall is identified.
• Secure short-term capital: Leaders should close the liquidity gap as quickly as possible. Immediate options include requesting payment from customers, using invoice factoring, and selling nonessential assets if necessary.
• Stabilize operations: Customer-facing operations should take priority. If vendor payments must be delayed, communication and possible negotiations should happen before a payment becomes late.
• Identify the root cause: Once the immediate crisis has passed, the triggers should be identified and addressed.
• Prevent recurrence: Best practices such as maintaining a rolling 13-week cash flow forecast, vetting customers, monitoring receivables, diversifying revenue streams, and preparing flexible funding can help prevent another crisis.

“Invoice factoring, a source of working capital funds for B2B businesses with open invoices, can be invaluable during a liquidity crisis and is more accessible than traditional financing options,” Rosenthal added. “Because it’s versatile, businesses can secure funding quickly in an emergency or set up their funding relationships in advance to have them ready if needed.”