Let’s be honest about cash-flow for your business. It’s not always something to brag about. We all hear people say cash-flow is king [and it is]. After all, without it you basically have a hobby rather than a business. Or if you have cash-flow but it’s not good then that probably means your expenses are greater than your revenues.
But if cash-flow is king, then are we prepared for the times when our cash-flow isn’t so awesome?
Before we dive in let’s see if we can agree on something. Financing is always a means to an end. In other words, nobody gets a loan for no reason and for no purpose. We use it to buy properties, equipment, and for working capital among other things. If we had the cash reserves that Apple has then we probably wouldn’t be trying to figure out how to get an SBA loan or how to get a working capital line of credit. At its best we use financing as a tool to start, build, and grow our businesses and at its worst we use it to stay afloat when times are tough.
Below are four key ingredients that will not only have you prepared for slow times and unexpected cash-flow crisis, but they will also help you be prepared to obtain your financing in the future as your business grows and has additional financing needs to support that growth:
When Possible, Get Your Financing “Before” You Need It
It may sound counter-intuitive, but it’s simple. You can’t get a real estate loan or equipment financing “before” you need it. However, you can [and should] get your working capital line or lines of credit before you need them.
If you’re like most people you’re familiar with the loan process because you’ve probably bought homes and cars and got loans to pay them off over time. If you’re obtaining a loan then you’ll normally want to wait until you “need” the funding because loans require you to make monthly payments regardless of what the money is being used for. Whereas a line of credit has no monthly payments until you draw on the funds and begin using them. There’s a big difference between loans and lines of credit.
Be Sure You Understand The Options That YOU Can Employ
We all have different options based on things like our industry, geographic location, collateral, business seasoning, personal and business credit, etc. Do you know what you can and can’t do? This is important or you’ll make one of two mistakes. You’ll either get the wrong type of financing or your confusion will lead to fear and paralysis.
Doing nothing is worse than making the wrong decision because there’s no action when you do nothing. Action at least means you’re moving and you can change course or learn from mistakes but never getting into the game and making decisions is a crime punishable by you never reaching your goals and dreams. Learn your options and take advantage of them.
Use Your Credit Cards The Right Way
This may seem odd but it’s one of those things that nobody really talks about. Statistically, according to NFIB, 79% of small business owners use credit cards (PDF). Meredith Whitney says that 82% of small business owners use credit cards as a “vital part” of their overall funding strategy.
The problem is that most small business owners use credit cards the wrong way. That means they don’t separate their personal and business credit with their credit cards, they hurt their personal credit profiles and FICO scores, and they limit their ability to obtain additional financing in the future. Credit cards are definitely a tool to help with some cash-flow issues but you’ll obviously have to cover that additional debt service in the future if you use it today to get out of a cash-flow crunch. I’ve done it, as have many others, but do it responsibly.
Protect, Preserve And Build Your Personal And Business Credit
We all know that credit is important for mortgages, car loans, business loans, and many other areas of our lives but, what are you doing to either preserve it or improve it? Are you treating your credit as an asset and protecting and preserving it? Do you know “how” to do that?
Monitoring your credit, cleaning up errors, and not over-utilizing your credit cards (the ones that show up on your personal credit report) are all ways to start treating your personal credit as an asset. Business credit is a different animal and will likely require a strategic build.
Business credit doesn’t “just happen” the same way your personal credit does. It’s usually a process of strategically acquiring a series of vendor lines of credit for things like office supplies, computers, gas, etc. It takes time and the rewards rarely come quickly but you’ll be glad you did it if you stick with it.
We recently bought a new phone system and, because of our good business credit, I didn’t have to personally guarantee the loan and they only looked at our business credit in order for us to get approved – they did not review my personal credit as part of their underwriting process.
Businesses have cash-flow cycles – and it’s not just the “seasonal” businesses. It comes with the territory and especially as you are building the organization. Use some of these strategies to be prepared to deal with that slow month (or more). It’s never fun to deal with the curve balls that running a business throws at us but if you do these things and execute them properly you’ll set yourself up to hit the curve balls and stay in the game rather than striking out.
If cash-flow is king, what are you going to do about managing the tough times when the cash-flow is slow?
Key to Solution Photo via Shutterstock
Good article Tom. Small business owners should not overlook capital available from the equipment and vehicle leasing industry. For early stage companies a good rule of thumb is to use bank lines for operations and real estate, credit cards for short term expenses, and leasing for fixed assets that contribute to revenue generation, i.e. equipment and vehicles that essentially should pay for themselves over time. Leasing is not always the lowest cost source of funds, but can help considerably with the cash flow equation, as I try to show in this article: http://leasedirectcanada.com/2011/02/08/equipmentleasing/
Thanks,
Frank
I definitely agree with your point about getting a line of credit before you need it but I would caution small business owners from using the line of credit just because it’s there. If your business can survive without it, wait until an opportunity comes along to buyout a competitor or purchase inventory that is being sold at a deep discount.
Tom Gazaway
Well said Steve. I hope you didn’t get the impression that I was advocating using credit lines “just because.” I personally think it is a far bigger problem that people wait too long to try to get their working capital lines of credit vs. over-usage. Both conversations are good ones. Using working capital for Revenue Generating Activities [RGA] is another good usage of funds. Thanks Steve!
Mariah
Mr. Gazaway makes some excellent points about financing strategy for small businesses. Though it may feel strange to secure funding when business is booming, it’s a tactic that can save a small business if and when customers stop paying on time or when faced with a sales slowdown. It’s also important to find the financing solution that is a good fit for your business. There are many different types of financing available for small business owners – including many alternative options that offer more flexible terms than traditional bank loans. I work for The Receivables Exchange where we turn small business invoices into cash through an online marketplace. Business owners can sell as many or as few invoices as they like, as often as they like, with no long term contracts. As Mr. Gazaway states, “Learn your options and take advantage of them.”
Good advice.
Ti Roberts
Hi Tom,
Great post here. You did a great job at explaining the various uses of seeing financial assistance for keeping a business functioning. I run an internet marketing blog / consulting business and I haven’t had to take out a loan. There’s been times where I’ve struggled with cash flow within my business but I also worked a part-time job and attend college so I had income to cover me.
I learned a lot from your post about the differences in the financial options available to us as small businesses owners. I’ll definitely be referring back to your post in the future.
Thanks for sharing this info with the community, I appreciate it!
Ti
Tom Gazaway
You’re welcome Ti and thanks for your comments. I’ll have to look up your marketing blog…there’s not many things more important than marketing and getting the word out about your product/service/brand. Thanks again Ti and best wishes as you finish college and live the small biz life!