6 Financial Challenges for Small Businesses and How to Overcome Them

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Small businesses are crucial to the economy. In the United States alone, small businesses comprise 99.9% of all the businesses. That’s 30.7 million small businesses providing goods, services, and about 1.5 million jobs per year. Because of this, it does not come as a surprise that they play a massive role in global economic growth.

They are also important to the personality of a community. Small businesses are closer to their customers, weaving them into their community. They can tailor their services for the specific needs of customers. Because of this, they form relationships and foster a stronger connection with their customers. This is a customer retention strategy that comes easily with small businesses.

Being your own boss may sound appealing, but running or starting a small business is not an easy feat. There are several challenges that entrepreneurs face on a regular basis. They have to deal with financial problems that affect the daily functions of the business as well as long-term situations.

6 Financial Challenges That Small Businesses Face

 1. Lack of Capital

Entrepreneurs take a huge risk when starting their businesses. Capital dictates most of their actions from the beginning of the business venture. Without capital, owners will have a hard time starting and expanding their businesses. More importantly, they need enough working capital for daily expenses.

In 2018, 67% of small business owners cited lack of capital as the leading challenge. By 2021, another survey reported a lack of capital as the top non-COVID challenge at 23%.

The source of capital for small businesses is usually a mix of cash and credit. Yet, banks are a little conservative when it comes to business loan applications. Big banks have a 25.9% approval rating for small businesses, only granting three out of ten small business loan applications.

Because of this approval rating, entrepreneurs need to be aware of their credit scores. A knowledge of their credit score increases the chances of loan approval.

Other than bank loans, small businesses can delve into various ways to secure capital. Here are some of their best options:

  • Venture funding. This is available for small businesses that exhibit huge potential. Investors give a specific amount of money with the belief that the start-up will generate a large return in the future.
  • Private equity. Businesses can have investors directly fund the company, doing away with the public market.
  • SBA-backed loans. There is a variety of loans that small businesses can get, depending on their needs.
  • Personal savings and connections. Small business owners can contact their family and friends or use their personal funds as capital.

2. Cash Flow

Together with lack of capital, cash flow is one of the top challenges of small businesses. This is a pressing issue for every business because you need cash to pay bills, taxes, invoices—pretty much everything.

According to NetSuite, “Cash flow 101 involves balancing accounts payable and accounts receivable.” Your payables and receivables should be in harmony with each other. To avoid paying your bills late, you should already have your receivables before your payables are due.

Additionally, businesses should study their past “performance and current conditions. The former is to observe trends that may apply to future finances. The latter reflects possible challenges that the business may face in terms of external factors. These factors include the economy, industry, and consumer behavior.

Businesses may alter their strategies for payment processes. The following are ways you can improve your business’ cash flow:

  •   Offer discounts for customers who pay early. This way, they are motivated to pay their dues to your business, and you can meet your dues.
  • Check your inventory. Evaluate the items that sell fast and those that do not. By minimizing expenditure on items that do not sell as much, you can improve your finances and add the money into the cash flow.
  • Improve your invoicing. Be punctual, straight-to-the-point, and clear with your invoices. Include the due date, the amount, and other important information legibly.

3. Marketing and Advertising

Competing with companies that have bigger budgets for marketing resources and advertising materials may lessen your opportunities to reach consumers. About 49% of small business owners do their own marketing. Along with this, 22% cited “finding time and resources for marketing” at the top of their challenges in 2019.

Today, there are numerous avenues for marketing and advertising, especially with the presence of technology. The internet, for example, offers websites, social media, SEO, and other digital content strategies. Luckily, these media are one of the cheapest ways to market your business. Here are tips on how to do marketing without breaking the bank:

  • Social media. Making a Facebook, Twitter, or Instagram account is free, and they have built-in business features. To expand your reach, use hashtags and location services, and ask everyone you know to share your posts.
  • Paid ads. Paid ads are a cheap way to have your advertisements reach people who may be interested in your business. They can be on social media, websites, or even YouTube.
  • Use influencers to promote your business. Through their huge following, they can introduce your product to an audience within your niche. This strategy also creates a trust factor because they can guarantee their followers that they are satisfied with your product or service.
  • Ask local artists to design your materials. Entrepreneurs already take on too many roles, and not everyone has the skills to make things pretty. The thing with the internet is that you should capture their attention. One way to do this is to have professionally done marketing materials.

4. Unforeseen Expenses

One of the biggest risks of running a business is the unexpected hurdles. Let’s take for example the COVID-19 pandemic. One day, everything was working perfectly fine. The next day, businesses had to close due to lockdowns, drastically affecting their operations and finances.

As an entrepreneur, you should be ready for these circumstances. Having an emergency fund or a buffer fund can help you overcome the struggles that come with these events. Consider allocating a certain amount of money to a separate fund. To guarantee the safety and security of the fund, it should be independent of your main business account.

Pay attention to your contracts as well. They might have a force majeure clause. It offers entrepreneurs a remedy when a fortuitous event or an “act of God” happens. These are unforeseen events that are out of anyone’s control. An example could be a pandemic. This remedy may save you from paying certain dues, depending on the judgment of appropriate authorities.

5. Mixing Business and Personal Finances

Not separating business and personal finances is a huge no-no for an entrepreneur. A lot of problems could arise in the future because of this. For example, it complicates the liquidation of assets and may also affect your taxes. 

The best way to fix this is to open a separate business account. Your personal account should receive a specific amount that serves as your salary. All your expenses outside of the business should be dealt with by this account. 

On the other hand, the business account should handle everything about the business. Bills, rent, receivables—these should only be contained in the business account.

6. Hiring Qualified Employees

Small businesses have difficulty acquiring a quality workforce because of their competition: big companies. In 2019, 52% of small business owners found it more difficult to find qualified employees compared to the past year.

This could stem from various reasons. Applicants want to prioritize larger companies because of the benefits. Financially, the biggest challenge is the compensation of having quality staff. Some small businesses cannot afford to meet the salary expectations of qualified employees.

This does not mean that small businesses should stop encouraging people to apply for them. Financially competing with larger companies could cause a strain on your budget. However, there are simple ways to attract quality employees:

  • Post a clear job description. Be transparent with the roles expected for the position. Completely state the requirements such as experience, education, skills, etc.
  • Emphasize the perks and benefits. Free lunches, paid leaves, government benefits—all of these should reflect on the job posting. Your perks and benefits might be your edge.
  • Show them their opportunities to grow. Gaining experience, learning more knowledge in the field, and acquiring new skills are important to employees. Convince them that your company can provide enough experience to move their careers forward.

The Takeaway

Small business owners take on different roles in running their businesses. Their biggest challenges come in the form of finances, as they have to face a lack of capital and cash flow problems. These problems affect their marketing strategies and the quality of their workforce. On top of these, they need to make ends meet when unexpected events occur or when they are handling their personal expenses.

For every problem comes a solution. A mark of a good entrepreneur is the ability to find strategies for business survival. It could be a huge leap, like taking out a loan. It could also be something as simple as a clear and precise job description. Either way, these strategies help small businesses stay afloat.

Author Bio:

AJ Balois is a Content Manager at BPI-Philam, a bancassurance company, based in the Philippines. She’s been working in the banking and insurance industry for seven years. Upon realizing the power of being financially literate, AJ promised to share her knowledge through informative and educational content.
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