Life Preserver: Small businesses need prompt payments to stay afloat

Life Preserver: Small businesses need prompt payments to stay afloat
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Mayor Mike Duggan made a commitment to not only make Detroit a small business destination, but ensure long-term entrepreneurial success.

The mayor’s programs, in conjunction with the Detroit Economic Growth Corporation, such as Motor City Match and the Motor City Re-Store, are examples of providing grants focused on supporting and investing in businesses long term.

Many neighborhood businesses face one huge hurdle – getting paid on time.

Since its inception in 2015, Motor City Match has provided nearly $4 million in grant funding and assistance to 87 businesses, while Motor City Re-Store, launched earlier this year, will provide $500,000 quarterly in matching grants to businesses focused on improving commercial exteriors.

One of the biggest barriers preventing start-ups from becoming “been-ups” is the ability to maintain adequate cash flow. TheHUB publisher Jackie Berg (right) and Mark Lee discuss issues that impact small business and neighborhood development at CBS Detroit’s studio. Photo by Paul Engstrom

Strong businesses mean more jobs, increased investment and an overall improved economic landscape. Today, there are positive signals of neighborhood business success.  There are more announcements about successful start-ups and increasing evidence our “been-ups” are beginning to thrive. Nearly everyone seems to be buoyed by a lift in neighborhood foot traffic critical for business success.

These “stay ups” are a critical part of the mayor’s strategy to support a strong small business ecosystem across Detroit. After the initial launch, keeping those businesses afloat is essential. Many, however, face one huge hurdle – getting paid on time.

Late payments risk a business’ cash flow and make it more difficult to handle daily operational expenses, hampering long-term sustainability.

For newcomers, it’s critical to pay bills in a timely manner. Nothing kills a small business faster than losing credibility with vendors and service providers that are more likely to cease service delivery, tighten credit or even demand upfront payment at the first sign of cash flow issues of small business customers.

Getting the money needed to support more restrictive demands is tough for many small business owners, who often are not paid on time from their customers.

When that happens they have a decision to make.

Do they wait to pay them until they are paid or use personal resources to support daily operations, if available? That might include borrowing, leveraging property (mortgaging a home, for example), accessing valuable retirement accounts and/or using cash.

There are many reasons why payments are not received on time. The cause can be from inefficient internal processes or invoice is lost in the customer’s system or has been caught up in the “bureaucratic process.

Small businesses can do several things to improve their cash flow from customers.

One, negotiate payment terms, including requiring a percentage of total billing be paid in advance, particularly for services that require large capital expenditures to fulfil.

Two, get a better handle on your projected expenses and related cash flow needs.

TechTown Detroit’s Managing Director Regina Ann Campbell recommends that small business have access to an appropriate line of credit, but avoid the kind of “excessive use” that leads to business failure. Photo by Michelle & Chris Gerard

Regina Ann Campbell, managing director, TechTown Detroit, recommends establishing a potential line of credit that can support cash needs up to 60 days. However, she cautions, “be careful with excessive use of the credit.”

More extended payment terms are riskier for small businesses. She says if a business needs a loan to cover its 60- or 90-day receivables it should negotiate the loan on an as-needed basis in small monthly increments versus a larger lump-sum loan.

When large amounts of capital are on hand, it’s easy to lose track and expend funds for day-to-day business needs not supported by receivables. That, she says, is a dangerous proposition.

Three, detail payment terms in written agreements that contain specifics mutually agreed upon by both parties.

Four, make payments easier for customers. Accepting credit card and electronic payments is critical to the success of small businesses today. Many companies are looking beyond mailing checks and prefer to remit electronic payments because it eliminates the cost of printing, mailing and processing.

It is not unusual to charge a convenience fee for electronic payment processing, which for many businesses ranges from one to five percent of the total billing.

Five, make sure the proposed deal and its terms are best for your company.

“If none of these are possible, don’t be afraid to say “no,” Campbell says. “Not every deal will make financial sense for your business.”

Small shops are the mainstay of our neighborhoods. Open the door and look inside and you will discover dreamers and doers who embody the spirit and energy of Detroit’s entrepreneurial class. We invite you to meet them inside our Small Shops series, sponsored by Bank of America.

With such promising news on the horizon, it’s more important than ever small business owners and their supporters pay attention to and manage the things that matter most.

Managing cash flow and getting paid on time dominate Detroit’s small business environment. Improvements to both mean prosperity to us all.

Editor’s Note: Mark S. Lee is a strategic business advisor to TheHUB, and the president & CEO of The LEE Group, and host of WXYT 1270s “Small Talk with Mark S. Lee.” You can follow Mark @leegroup.

This Small Shops business feature is sponsored by Bank of America. To learn more about Bank of America’s many programs and resources for small business owners visit: https://www.bankofamerica.com/smallbusiness/business-financing.go

 

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