What if a client has less than a 90-day runway?

Posted 12 February by Jeremy Burke in Advisory, Cash Flow, Tools and Resources

Finding immediate and emergency solutions for cash flow issues.

What would you do if you woke up and found out that your business has less than three months left to live? 

It’s every CPAs and every business owner’s worst nightmare. When a business is running out of runway and it’s a matter of “take off” or “crash”, what should you do? 

In this article, we’ll answer important topics like:  

  • What if a client has less than a 90-day runway?
  • Understanding Line of Credit and Alternate Financing
  • Understanding Current Government Programs
  • What is a shareholder’s loan and how can it help?

So, let’s find out exactly what you should do when a client has less than 90 days of runway left in their business. 

What if a client has less than a 90-day runway?

In simple terms, this means that the client has enough cash flow to sustain operations for less than 90 days. 

If the business can’t afford to pay employees, employees start leaving. If a business can’t afford to pay rent, the landlord can kick the business out. And while your client’s business may be owed large sums of money, if it doesn’t have savings or cash on hand to cover the day-to-day expenses, the business may close before these payments even arrive. 

Poor cash flow is the number one reason for small business’s failures. 

However, there are a few options you can recommend to your clients so they can start cutting expenses and/or improving cash flow in the short term: 

  1. Take a salary cut or reduce your head count via furlough 
  2. Consider raising money or taking on a loan 
  3. Consider taking on a business partner 
  4. Finance your invoices or purchase orders 
  5. Talk to friends or family about investing 

While these options are not ideal, your client having to close their business is even less ideal, so essentially, they are better than nothing. 

What option your client chooses will depend on how comfortable they are with risk, as well as additional factors that may impact their business/financial standing. 

Understanding Line of Credit and Alternate Financing

Taking out a line of credit to cover current or upcoming debts can be a good option if your client knows they’ll be able to pay it back. For example, if they have invoices or purchase orders that are waiting on payments and they know for a fact that these invoices will be paid, then a line of credit could be a good idea. 

If your client has no sales and takes on a line of credit, you’re adding insult to injury as they will not be able to pay it back. 

The same goes for financing invoices or purchase orders. If your client has outstanding invoices or purchase orders in their Accounts Receivable, they can take on financing against these invoices and instead of waiting 30-90 days for payment they can receive funds in advance. 

When the customer pays the invoice the financing is also paid back. This is called refactoring. 

Purchase order financing is similar but only applicable to companies that sell goods (not manufacturing). Financing an order allows you to pay your supplier, receive the goods to sell, and repay them once the goods have been purchased. 

Understanding Current Government Programs

Currently there are a number of Government Programs available to help small businesses that are struggling because of the economic climate. 

If you need less than $50K you can consider a microloan, which is often easier than the option to finance your business. These loans are easier to get for businesses that are not well established or do not have many assets to use as collateral. 

Depending on who provides your microloan, the interest rates can also be significantly less than lines of credit or financing. 

What is a shareholder’s loan and how can it help?

Using a shareholder loan means that if you, as an owner of the company, have contributed any amount of funding to the company (in the form of purchasing shares, for example) you are able to withdraw an amount of funding from the company to use in the business. If this is not in the form of a salary or dividend, it will be denoted as a loan from the corporation to the shareholder. 

Like any loan, you must repay it to the company. But it can help you out of a bind if you know you will be able to get it back. 

These are just a few of the options available to business owners with less than 90 days of runway remaining. Of course, you can always ask friends or family to help support your business, but you should make sure you’ll be able to pay them back, or else it could put a strain on your relationships. For more like this, visit dryrun.com

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