The year 2022, has witnessed a new normal after so many broken stories. All offline businesses have restocked and open doors for consumers but direct-to-consumer (DTC) brands have made such an impression on the minds that they are still a preferable model for the millenials.
In every industry, startups are particularly vulnerable to cash flow problems and even a profitable business can experience issues with cash.
A cash flow problem occurs when the amount of money flowing out of the company weighs more than the cash coming in. This causes a lack of liquidity, which can inhibit your ability to make payments to suppliers, pay your bills, repay loans, and run the business effectively. There are many causes of cash flow problems in businesses that can be broadly classified into three categories:
- Poor sales
- Inadequate credit control and collections processes
- Ineffective cash flow management
Here are also some of the most common causes of company cash flow problems:
- Your customers are slow to make payments.
- The overheads are too high.
- There are no cash reserves.
- You have no debt facility.
- You are holding too much stock.
- You ignore your bookkeeping and financial statements.
- Your bad debt is too much.
How to Solve Serious Cash Flow Problems?
There are still some potential solutions available to you if you are experiencing an immediate threat to your business, but each option comes with a caveat.
Venture capitalists or angel investors are the most obvious choice for funding any DTC business, though they are usually difficult to get as they are most interested in hyper-growth startups and seek at least 10 times return on their investment. Getting VC funds makes sense for startups that require heavy investment, but if you are getting your DTC business funding from investors, early in your business can leave you with less stake in your company and hence lesser control. Alternatively, bank loans will require you to be profitable and seek personal guarantees and collateral for the loan. The banks have cumbersome offline documentation process and compliances.
It is always better to scale your business and reach significant milestones before looking for VC funding or bank loans. Revenue-based financing is the best option as you get the investment to grow without losing any stakes in the company.
Revenue-based financing is a straightforward funding method. In this model, loan repayments are tied to the monthly revenue of the business. The good thing about this option is that lenders can provide initial operational capital for DTC brands to set up, manufacture, and market products, and as the brands grow in sales, they can pay back the loan. One of the benefits of this model is its effectiveness. It helps in meeting the immediate cash flow requirements. Through this option, one can access funds and facilitate capital growth.
Unlike other financing options such as bank loans and VCs, RBF is tailored to your working capital cycle, and remittances are based on a percentage of your daily sales. If the business slows for a month or stock doesn’t arrive on time, RBF protects you and your business. Entrepreneurs can use cash advances to finance their working capital needs like inventory. Reducing monthly cash flow bottlenecks, business remittances automatically scale as sales increase or decrease.
The features of RBF come in handy for startups and allow them to witness organic growth and sustainable profitability. Nonetheless, entrepreneurs who avail of RBF services offered by VedFin receive easy terms of repayment, quicker evaluation and quality integrated cash flow solutions.