Hoping the problem doesn’t occur isn’t a great strategy, so now is probably a good time for owners and financial leaders at smaller companies to explore alternatives to shore up their ability to weather recessionary threats to their cash flow.

That’s particularly important because cash flow issues cause more than 80% of all business failures, according to a survey from the business mentorship organisation SCORE. Compounding the problem, small businesses often lack leverage with their customers, which means that getting their invoices paid can turn from a challenge to a nightmare when a recession pulls in the reins on the economy. 

The kinds of companies and organisations that smaller suppliers often do business with –  hospital systems, major retailers, large manufacturers, and even state and local governments – all have different accounts payable procedures and systems. Anytime any kind of cash crunch hits, those cash supply lines tend to kink up, but in complex and different ways.  

Small business vendors selling to large companies constantly have to stare down that payment uncertainty, but recessions compound the problem. That can create a cascade of problems and headaches for owners just when the broader economy is forcing them to juggle even more pressures on their company’s finances from slow demand, desperate competition, and ongoing payroll, rent, and inventory costs. 

When cash is slow in flowing from customers, more often than not, the business owners themselves have to personally fund their company’s ability to keep the lights on. That creates stress, risk, and damage to personal finances that every entrepreneur dreads.

When cash flow challenges hit the average small business, using personal credit cards becomes most owners' first instinct. That generally doesn’t go far as credit limits kick in, and also comes with painfully high interest rates and fees. 

Some companies that get a high percentage of revenue through credit cards can access merchant cash advances through private capital sources, but those often come with sky-high interest rates and additional fees that bury borrowers in debt. 

With recessionary fears already roiling markets, it’s unlikely that most businesses can look to bank or SBA loans to weather the storm. Since the 2008 global financial crisis, small business lending has largely moved out from banks and into the hands of private lenders. But these lenders are seldom willing (or able) to loan without asset-secured lending agreements, meaning they require some asset – a building, a home, valuable capital equipment – to be offered as collateral. That becomes very risky business quickly.  

Factoring, where a business sells its accounts receivable to a finance company, has long been a part of the small business playbook, too. With factoring, owners can sell their accounts receivable to a company that will provide them with the money they're owed. But it's only a partial solution – and one that still carries significant risk. Factoring generally requires owners to provide a personal guarantee that their customers will pay up – and on time, too. Owners are subject to exorbitant late fees if the invoices aren't paid. 

The risk of factoring also increases in a recession, when a small business’s larger-scale customers with more complex and unpredictable financial pressures are involved. That means turning to a factoring company may provide temporary capital relief, but comes at the price of  considerable risk to the owners' credit. 

However, with the evolution of the banking system, the capital markets and technology, non-debt financing alternatives are now emerging. These solutions are similar to the payments tools that have been innovated for consumer finance applications, like the booming “buy now, pay later” (BNPL) marketplace associated with e-commerce finance.

The first wave of these payment solutions are focused on invoice financing. If a business has recurring customers with solid finances (even though they may be slow or unpredictable payers), new payment tools allow companies to sell their invoices to a third party without taking on debt or making personal guarantees. The business gets the cash it is owed from the invoice while paying a fee to the third party who collects the amount owed from the customer, while the business is freed from both collections and credit risk.

Creative and alternative payment tools for companies to overcome the challenge of invoice payment timing is one of the most significant market opportunities for innovation and growth in the US economy. Bill.com alone processes more than $70 billion in invoice volumes a quarter and the market for B2B transactions is over $10 trillion a year.

Preparing for recessionary storms ahead is best accomplished before the rain starts falling in earnest. Small business owners are well-advised to start doing their homework now on cash flow financing alternatives that can help provide some shelter from the gale.