Cash is the life blood of every business. No matter how successful you are, if you run out of cash the consequences can be dire.
Ensuring there is always cash in the bank (regardless of seasonal highs and lows, investments in cars or machinery, or fast business growth), requires planning. Creating a business plan with forward sales and expense projections as well as cash flow estimates may be all you need to ensure your cash situation is under control.
But sometimes future projections show up weaknesses or risks that need to be addressed. As long as your business is basically profitable, bank financing can be a good way to ride out cash flow storms.
The best type of bank financing will depend on the nature of your business and the reason for your cash flow shortfalls.
For new companies with less than one year in operation, a credit card may be the only way to secure debt. While the interest rates are high, the good news is you will be building your business credit score.
A credit card is also a good option if you need financing to cover operational costs that can typically be paid back within a month.
A term loan enables you to borrow a lump sum of money and pay it back in fixed weekly, fortnightly or monthly payments. This type of loan allows businesses to spread out the cost of major investments.
Term loans are best suited to established businesses wanting to fund investments that can be shown to demonstrate a steady stream of cash flow sufficient to easily cover repayments.
A line of credit gives you access to cash (up to a pre-set limit) as and when you need it.
This is best suited for businesses that need to cover seasonal cash flow gaps, or fast-growing, established businesses that may need to cover increased expenses before increased sales start to roll in.
Before you approach the lender, it is critical that you have a business plan that includes a realistic budget and cash flow projections. It doesn’t have to be long or complicated, it just has to be well thought through and you need to be able to back up the numbers.
Careful planning not only helps you to figure how much you need to borrow and when, it also provides a powerful negotiating tool when you are talking to the bank.
If you aren’t sure where to start, talk to one of the Partners at HQB. We can help you to prepare a simple business plan or budget and cash flow projection that will help you to effectively manage your business moving forward. Where a loan is required, we can also help you manage discussions with the lender.