Many early-stage and sustaining businesses find themselves running into cash flow problems for a host of reasons throughout the company’s evolution. Perhaps they grew at a faster pace than their profits could support; perhaps they needed to invest in equipment or hire new staff to service their growing customer base. Whatever the cause is, solving that issue is not just about securing cash flow financing, but securing the right type of financing. There is a strategy to assess your cash flow borrowing needs.
Often, young entrepreneurs often find a lending source and get so happy that they can solve their short-term crisis, but they haven’t looked at the long-term impact.
The right financing can support unending growth, whereas the wrong financing deal could make matters worse.
Here are the 5 tips for cash-flow funding when considering business financing, as shared by a loan specialist at Franklin Merchant Capital.
What information should a small business look at to determine the best type of cash flow solution for them?
The merchant must keep in mind the short and long-term goals to determine what’s best for their business plan. For example, if they anticipate a slow season ahead, they should enroll in a long-term plan freeing up operating capital per day. If a merchant anticipates a busy season ahead [with future receivables] but has short-term project(s) now, a merchant should get a short-term funding program to keep the cost of money down; and potentially take advantage of pre-paying discounts.
Should a business have a certain profit margin to consider cash flow financing?
Obviously, the better margins a business has allowed them to turn a bigger profit from these working capital loans. Profit margins are key to determining if such loans would work for them. Using other people’s money, done correctly, allows a business to flourish.
Is cash flow funding limited to long term vs. short term?
No, it all depends on their proforma of future projects i.e. slow season, busy season, or expected expansion spike. There are many types of programs that can be customized to their needs.
What can a business do on a daily basis to raise its profile in the eyes of a lender?
Lenders like consistency and stability. So keep daily balances (showing in their bank statements) as high as possible; avoid negative day balances and non-sufficient funds status. This makes the business a stronger file. And investigate funding options long before you need them. Build the research into your business plan, and at that time take advice from professional funding specialists.
Should a business look to a big brand name lender, or a smaller boutique lender?
They each have their strengths. But for most small and growing businesses, a boutique firm provides more customization, working closely with the business to develop a viable solution for their needs. A large lender, on the other hand, tends to have a preset criterion that a business has to squeeze into.
Note that financing used correctly can provide cash-flow stability and sustainable growth. However, whatever financing you ultimately obtain comes with a cost. Many small businesses tend to wait until their cash flow is desperate to act, and in doing so may make quick decisions that have not been properly vetted for the long-term health of the company. So be sure to make sure you’re not biting off something you can’t sustain. Evaluate your sales consistency, high and low seasons, your margins, your operating profit, your bottom line profit, and then talk with a seasoned boutique lender to assist you in crafting something that works for your business goals.
(originally posted in Entrepreneur Magazine)
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