How to manage a business cash flow crisis
Get a few actionable tips and solutions to help you overcome a cash flow crunch.
Updated 
4 min. read
Every business experiences an occasional cash flow problem – it can happen to a startup or an established business. It may be due to late-paying customers, unexpected expenses, expansion costs, sales seasonality or bringing on an additional employee. The loss of anticipated customer sales can also disrupt your business cash flow.
Whatever the cause, you can relax knowing there are different financing solutions available to you. Here are some actionable tips to help you overcome a cash flow issue.
Identify the cash flow problem
Diagnose the source of your woes to understand what happened before taking corrective action. Check if your cash flow problem was caused by:
Slow sales. While every business will experience a sales slump, often caused by the seasonal nature of the business, a prolonged period of slow sales may point to a deeper issue. Revisit your business plan and target market definition to make sure both are still relevant. Consider reviewing your sales and marketing activities to see what could be improved.
Loss of a customer. The loss of a big account can deal a serious blow to your cash flow. Or, maybe an anticipated sale fell through. You may need to borrow enough money to help cover expenses while you work to replace that customer.
Unexpected costs. Your business may be hit with an unexpected expense caused by equipment breakdown, rising supplier costs, an insurance rate hike or a large tax bill. It’s important to determine if this is a one-time issue or an ongoing additional expense so you can adjust your financial forecast accordingly.
Late-paying customer. For B2B companies, a late- or non-paying customer can be devastating because you are counting on that money to help cover your operating costs. Start by contacting the customer personally to try to collect payment or, if necessary, work out a payment plan.
Rapid business growth. Your business may not have enough working capital to cover costs associated with new sales – there’s often a gap between making the sale and getting paid, and meanwhile you’ve got bills to pay. For example, you might need to hire an employee to fulfill a new customer contract. You may want to slow down growth or review your access to capital.
Determine how much money you need to fix your cash flow problem
Once you understand the cause of your problem, calculate the exact amount of money you’ll need to make ends meet. For example, you may want to get a repair estimate to fix a piece of broken equipment. Use the BMO Cash Flow Forecast Template to update your figures.
Explore your financing options
Fortunately, you have several financing options available to you. Take the time to investigate each option to fully understand what’s involved. For example, you may want to consider applying for a business line of credit to see how much money you could have access to through your financial institution. If you’re in the fortunate position to do so, you can also consider borrowing from a family member, but make sure you take time to understand the impact this loan may have on your personal relationship(s). It’s important to understand and weigh all of your options before making your decision.
Here are some common financing options for businesses:
Line of credit
Ideal for shorter-term financing requirements, you can use a line of credit to access hundreds or thousands of dollars to pay your immediate expenses. It’s an ideal way to cover cash flow gaps, and you can repay the line of credit when your business returns to positive cash flow. You’ll only pay interest on what you draw from the open line.
Business loan
Best for longer-term financing needs such as expansion plans, you can apply to receive a fixed amount of money now and repay it over time with interest. Speak to your Business Banker about different types of loans and options for your particular business.
Equipment financing
When essential equipment breaks down, it can be a scramble to replace it – and cause a major cash flow crunch. Talk to your bank about equipment financing or equipment leasing to get the right equipment you need without spending all of your available cash on a purchase.
Business credit card
Credit cards allow you to conveniently charge day-to-day business expenses and pay at the end of the month. Cards carry an interest-free grace period giving you some time to pay current charges. Having a business credit card also allows you to separate business expenses from your personal expenses to make accounting and tax reporting easier.
Family and friends
Borrowing from loved ones is a common method to get quick cash and relieve a cash flow crisis. Just be aware of the potential consequences of taking money from family or friends. It could damage your personal relationship if things go wrong. Put any agreement you make about borrowing money in writing so everyone has clear expectations.
Personal savings
Provided that you have the funds, consider lending money to your business. Be careful not to jeopardize your personal finances by borrowing too much. Speak with a personal financial advisor or your accountant for custom advice.
Update your cash flow forecast
Once you’ve solved your cash crisis, update your cash flow strategy so you won’t be caught between a rock and a hard place again. You may want to take steps such as reducing customer credit, tightening customer payment terms, setting up your business to accept ACH (Automated Clearing House) or card payments, and obtaining overdraft protection. And, as a reminder, consider your financing solutions to create additional cash flow so you always have enough cash to run your business smoothly.
Don’t panic when your business experiences a cash flow problem. Pause for a moment, assess the situation and explore your options, weighing their respective advantages and disadvantages. Once you’ve made a decision, move quickly to implement your solution so you can keep your business in good financial health.
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