A business loan can be an affordable and flexible way to cover gaps in your cash flow when the waters get rough.
Cash flow is a straightforward concept: money in compared to money out of your business. It might sound a little boring, but keeping on top of your cash flow can be the difference between a thriving business, and one on the brink of closing its doors.
If you’re feeling the pinch from cash flow issues, you’re not alone - one-third of small business owners use personal funds, and almost half of business owners rely on credit cards to keep on top of day-to-day expenses and invest in their businesses. Failing to plan is one of the most common causes of cash flow woes, but unexpected expenses can occur even in the most organised of businesses. Maybe you’ve had a few of your top customers pay their invoices late or the winter months were a little bit slower than you were anticipating. Other common cash flow stressors include rapid growth, changes in your supply chain, accidents and not responding quickly enough to changing market conditions.
Operating a business isn’t cheap and the adage “you have to spend money to make money” rings true for business owners who are looking to not only manage the day-to-day but also invest in the future of their business. A business loan is one way to support gaps in your cash flow and keep your business going strong during quiet periods or while you are waiting to be paid for a big contract. An advantage of business loan is that can be a cheaper alternative to other short-term financing options, such as credit cards or invoice financing.
As with any finance option, you should take into account a few considerations:
The actual cost of the loan (fees + interest)
How much will you spend over the life of the loan in interest and fees? Are there any early repayment, or late payment fees that can add hundreds, or thousands of dollars on the cost of your loan? Are you being given a fair interest rate?
The repayment period
A longer repayment period means more interest to pay, but repayment instalments. The lower repayments can help in the short term, but you’ll need to decide if the short term savings outweigh a higher cost over the life of the loan.
How quickly you need the funds
Business loans can take longer to approve than payday loans or invoice financing - but this can come with higher interest rates attached so if you need the money quickly, this is something you should think about. Bigstone now offers 24-hour funding so you can have the money in your account almost as fast as your application can be approved.
The purpose of the loan
A business loan can be considered an ‘all-purpose’ finance option, whereas some speciality invoice or asset finance options can limit how you use the money. Business loans can also be unsecured, meaning that you don’t have to use the value of your property or inventory as collateral for the loan.
Who you are as a borrower
It’s a known fact that better borrowers get better rates. But being a ‘better’ borrower should go beyond the assets you have listed on your balance sheet. Look for a lender (like Bigstone) that takes a number of factors into account to give you the best rate possible.
Other ways you can keep your cash flow moving in a positive trend
- Renegotiate payment terms with your creditors to extend your payment terms and pay your bills and make other repayments on the last day possible.
- If possible, shorten the settlement period with your customers so that invoices aren’t going unpaid for weeks at a time. Have a firm credit policy in place and follow up on invoices as soon as they become overdue.
- Look for ways to diversify your customer base, so you aren’t reliant on one target market. You could adapt an existing product to meet a new need or extend your trading hours to capture a wider audience.
- For larger payments, ask for an upfront deposit and the rest of the payment on delivery of the product or completion of the service.
- Review all of your expenses to see where you can save money - your phone bill or insurance policy may be good places to start - or cut a cost altogether.
- Invest in cloud-based accounting or cash-flow forecasting solutions to help keep track of your accounts and always know how much cash you have on hand.
- Have an emergency fund at the ready so that you don't always have to rely on finance options to cover your bills.
Operating costs still need to be covered, regardless of the money you have coming in. Even if your business is otherwise financially healthy, a decrease in the cash you have available can have serious short term, or even long term consequences if you don’t take any action. Having a backup plan in place means you can still meet your day-to-day obligations until you get paid.