Last Updated on September 7, 2023
No business can survive for too long when its expenditures exceed the amount of money coming in, also known as negative cash flow. Periods of negative cash flow are not exclusive to businesses struggling to make money, as even businesses with high revenue can experience cash flow challenges. To combat this problem, business owners strive to improve cash flow by giving their company a cash infusion.
But what is a cash infusion, and how do you raise funds for a small business? Here’s a closer look at how a cash infusion or cash injection can help and what you should know about it.
What is a Cash Infusion?
A cash infusion, also commonly called a cash injection, refers to any time a business receives cash or equity in a lump sum from a third party. This money can then be used by the business for its own operations, for everything from managing payroll to executing a strategic growth plan.
Cash infusions are often used by companies that are struggling with their cash flow management, but even small businesses that are performing well can still benefit from cash injections, especially if they receive payments from clients on an irregular basis or experience seasonal revenue fluctuations.
How Does a Cash Infusion Work?
Generally speaking, cash injections for small businesses come in the form of a loan. For example, the U.S. Small Business Administration’s 7(a) loans program is available to creditworthy small businesses with a demonstrable need. However, the use of these funds is somewhat limited. Businesses can use a 7(a) loan for working capital, purchasing equipment and materials, purchasing real estate (including constructing and renovating buildings), or even acquisitions and expansion.
Banks also provide cash injection loans for small businesses. These loans have fewer restrictions on how business owners can use them.
Of course, like personal loans, these business loans also accrue interest charges. Business owners must be careful to ensure that they will be able to manage the repayment plans associated with the loan terms to avoid creating further financial hardship for their company.
Fortunately, traditional loans aren’t the only option for your business when you need cash.
The Importance of a Cash Flow Injection
Cash flow injections can make a powerful difference for your business at any stage. They can provide startup capital when you are first launching your business, or help ensure that you have enough working capital to maintain operations.
Essentially, a cash flow injection ensures you have enough money to keep your business running — especially when you wouldn’t have enough cash in hand under normal circumstances. Whether you’re using the money to fund expansion plans or simply keep things running smoothly, having additional funds readily available can provide much-needed peace of mind.
Signs Your Business Needs a Cash Infusion
You don’t always need a cash infusion to maintain a positive cash flow. But there are circumstances where receiving a small business cash injection could mean the difference between whether or not you’re able to stay open.
You Have Outstanding or Past Due Invoices You Can’t Pay
It’s estimated that 70% of small companies owe money to a vendor. The longer you go without paying invoices, the more your problems could add up. Sellers and suppliers might begin to tack on late fees or interest charges to overdue invoices. And if you’re late on payments for things like rent or utilities, you could lose access to crucial services (or even your building). A cash infusion will let you immediately cover invoices without running out of money.
You’re Failing or Struggling to Make Payroll
Struggling to make payroll is a serious problem for small businesses. If your employees don’t get paid in a consistent and timely manner, they aren’t going to stick around for the long haul, and high turnover can be even more costly for your business. Ensuring that everyone gets paid on time will keep your team happy and productive.
You Can’t Afford to Restock Inventory
When inventory is running low, you need sufficient cash on hand to restock items. Otherwise, cash flow issues will only get worse when your customers can’t complete purchases with you. A cash infusion will allow you to restock before inventory is sold out.
You’re Using Your Credit Card to Finance Purchases
You shouldn’t necessarily worry if you’re relying on credit cards to finance purchases, as they are often used for small business financing thanks to their flexible terms. But if you finance a business credit card beyond your ability to repay, your card can create major cash flow problems.
Credit cards carry much higher interest rates than loan products, which can cause your business debt to skyrocket. If you consistently carry a balance month to month on your business credit card, you’re likely doing your cash flow more harm than good. Even when using a loan for a cash infusion, more manageable repayment terms can help your business in the long run.
You’re in a Period of Negative Cash Flow
Even the most organized, well-run businesses can experience periods of negative cash flow, whether as a result of economic uncertainty, fluctuations in seasonal demand, or other factors. When you carefully track and manage your cash flow, you can take a proactive approach by building up reserves during periods of high profitability. If you don’t have enough to get through a period of negative cash flow, a cash infusion will provide the funds you need to keep everything running smoothly until things get back to normal.
Cash Injection Tips for Small Businesses
While a cash infusion can certainly help with your business’s cash flow issues, it is still a loan that you will have to repay with interest. When considering how to raise funds for a small business, it’s worth looking into other solutions that might be more cost-effective.
Consider Using Invoice Factoring
Invoice factoring can be a highly beneficial alternative to taking out a traditional loan, as it allows you to turn unpaid invoices into working capital. The factoring process is fairly simple; it involves selling unpaid invoices to a third-party factoring company in exchange for an immediate cash advance.
Once you sell your invoice, the factoring company will typically advance 80-90% of the total value of the unpaid invoices to your business. The factoring company then becomes responsible for collecting the money that is owed by your clients. Once the invoices have been paid, the factoring company will release the remaining value of the invoices, minus a small factoring fee.
Many companies use invoice factoring because it allows them to gain immediate access to cash without impacting their credit score or incurring additional interest payments.
Negotiate Quicker Payment Terms With Your Customers
One of the most common problems small businesses face is the amount of time it takes for clients to pay their invoices. In fact, on average, small businesses are usually paid one to two weeks after the due date on an invoice.
Because of this, negotiating quicker invoice payment terms can go a long way toward improving your own cash flow management. For example, if you currently offer net 30 payment terms (meaning invoice payments are due within 30 days), you might be better served switching to net 7 or net 15 terms instead. Receiving payments 15 days earlier can help you better manage your own bills.
Alternatively, you could consider offering early payment discounts on your invoices. These small invoices incentivize your clients to pay early in exchange for a small discount. While you may earn a bit less revenue this way, getting paid quicker is often worth the trade-off for business owners.
Before making any changes to your payment terms, be sure to proactively communicate with your customers. You don’t want misunderstandings to cause you to lose business.
Look Into Other Alternative Lending Options
There are several alternative lending options you can use to obtain a small business loan outside of banks or the SBA. For example, a merchant cash advance provides a lump sum loan based on your business’s anticipated future credit card sales. Automated Clearing House loans (ACH loans) offer cash advances based on the average daily balance of your business’s checking account.
Perhaps a better option is accounts receivable financing, a financing option where your outstanding invoices are used as collateral for a loan (AR financing is very similar to invoice factoring). Businesses with hard assets can also use machinery, real estate, or other collateral to obtain asset-based loans.
Depending on your business’s cash flow needs and overall financial picture, one or more of these alternative lending options could be a good solution when you need a cash infusion. However, you should always carefully evaluate the loan terms to ensure you can repay; otherwise, you could lose valuable assets or face massive interest charges.
What is a capital injection?
A capital injection or equity injection refers to when a private investor offers a lump sum of cash or equity to a business. Rather than serving as a loan that the business has to repay, the investor instead receives an equity stake in the business. This means they become part-owners of the company.
How does a cash infusion work?
Cash infusions generally refer to loan products offered by the SBA or banks. Businesses receive a lump sum upfront but must repay the loan over a set number of payments and with additional interest as defined by the loan’s terms and conditions.
How do I know if my business is in need of a cash infusion?
Anytime your business is struggling with negative cash flow, it is worth looking into a cash infusion. Common examples include when you have outstanding or past due invoices that you can’t pay or when you’re struggling to make payroll. However, cash infusions can also be used to support your growth, such as when you need to buy new equipment or upgrade your facilities.
Jim is the General Manager of altLINE by The Southern Bank. altLINE partners with lenders nationwide to provide invoice factoring and accounts receivable financing to their small and medium-sized business customers. altLINE is a direct bank lender and a division of The Southern Bank Company, a community bank originally founded in 1936.