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Inventory-heavy SMBs can escape the credit cycle trap

Oct 09, 2018

There are other options than credit for optimizing an SMB’s inventory management

For smaller or new businesses, whether that be a restaurant, a retail business, or operating as a tradesperson, it is imperative to make sure you not only have the stock and staff to cope with customer demand, but the flexibility to take on more when needed.

To have this staffing and stock flexibility, however, you need funds – money which can be difficult to get hold of quickly if you’re a small or micro business. This issue can become especially serious if there are delays in receiving capital from customers. They might hold off paying immediately for reasons of their own and, once paid, the money may take up to a day to arrive in your business account, and can take even longer if the transaction took place over the weekend.

This issue is compounded by the fact that retail businesses typically operate with narrow margins, and it may be the case that the smaller merchants are confronted with additional unplanned or emergency bills that they do not have the financial headroom to pay. They may feel they need to prioritize these over regular expenses – especially if they are to pay for urgent repairs to equipment or something similarly vital for their business.

As a result, many SMBs turn to credit, borrowing money in order to finance necessary expenditure while waiting for their already hard-earned money to arrive in their account. While this might be ok to bridge the gap over the short term, using credit from a bank in this way can prove expensive over time, especially if there are repeated delays in payment from customers – interest charges soon add up, making it harder and harder to make the repayments.

So what can small businesses do to escape this credit cycle trap? And is there is there another way to manage your finances so that your business isn’t beholden to credit facilitates? Here are four ways SMBs can set themselves up for success by improving their cashflow management and reducing their reliance on credit.

1.       Update your terms

A simple solution to encourage your customers to reimburse your supply business promptly is to shorten the payment deadline in your terms from 30 days to 15 days. After 15 days, you can begin any processes designed to incentivize speedy repayment, such as charging interest or following up with late notices.

Updating your repayment terms in this way can help you speed up the collection process, helping to minimize any gaps in your cashflow.

2.       Reward early payment

In addition to changing the payment deadline on your terms, you could try incentivizing early payment. This could be a discount on the cost of the initial transaction or a discount on a future order.

Such financial incentives give merchants extra reasons to factor timely reimbursement into their monthly budget, in turn, helping to optimize your cashflow.

3.       Split the fee

To support your customers in managing repayments, you could update your payment terms to enable merchants to pay part of the total cost of their supplies up front, and the rest either at a later date or in installments over a fixed period of time.

This approach not only helps you manage your own cashflow by providing you with part of your earnings straight away, it helps to reinforce your relationship with your customers, as you are providing them with a flexible way to pay, according to their needs.

4.       Team up with payment partners that specialize in managing cashflow

In addition to all of these ideas, it can be useful to seek expert help in mitigating the impact of delays in customer repayment. Payment service providers (PSPs) are ideal partners in this area – they already provide support with processing customer payments, and have a good understanding of your specific business needs.

The PSPs that understand this pain point have developed solutions designed specifically to assist businesses of all shapes and sizes in managing cashflow, particularly when they need access to their earnings immediately.

The rise of accelerated funding

Acknowledging that the financial gap between selling inventory and receiving finance to replace it continues to be an issue, payment service providers are innovating their service offering to provide SMB customers with their money more quickly through accelerated finding.

Unlike the traditional settlement options available to small businesses, this type of funding allows merchants to receive the capital they have earned as quickly as possible, without any overnight delays; at the end of each business day payments received in that day are settled immediately in a single transaction. It even allows merchants to receive their money on weekends or public holidays.

Benefiting from innovation

This is just one example of how PSPs are innovating to provide genuinely effective solutions to common challenges faced by small businesses.

By partnering with the right PSP, you can benefit from payment services and expert support custom-made for the needs of your company. As a result, you can be confident your company can weather challenges like delayed payments, so it can continue to meet its customers’ needs and thrive in a competitive marketplace.

If you’d like to find out how Accelerated Funding and Paysafe can help your business optimize cashflow, visit our website.

Let’s look at how we can help your business say goodbye to slow funding.

Get in touch

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