Should I get a Loan? should I get financing? how am I going to finance my business if my customers are not paying on time and I am spending way too much money? These like many other are very common questions, and we have said it before, they are very important ones. But they just come back, don’t they? Well, this blog is your lucky article. We want to tackle the decision-making process (or thought process) you need to go through to manage the cash flow of your business, from internal to external ways of doing so.
Build a 12-month cash flow plan:
Before you jump into financing and how to access it, lets actually see if you need financing. How to do this? Simple. Build a forecast by using previous trends, current known information, and predictions:
- Have a look at your last 5 months of cash flow position (Bank statements)
- See your projected inflows vs projected outflows next 5 months (Based on pipeline, etc…)
- Extrapolate the trend for the remainder of the year (2 months)
By doing these 3 things you will be able to have a full 12-month overlook of your cash flow position, make sure you don’t sugarcoat it. It is about having the most realistic picture of your business, not necessarily the one you want to see. If your cash flow position looks manageable then you don’t need financing! Otherwise, it will at least give you an idea of when you will need it.
It is important to note, that if you are already having a cashflow shortage then it is not about cash flow management, it is more about surviving. Consequently, you will definitely need external capital, the catch will be trying to prove you can repay the loan when you are cash flow negative already.
Deciding, Short term or long term:
Now that you know whether or not you need financing the next question is what kind of financing should you look for? To put it simply, there are a few things you need to clarify:
- Materiality: How much do you want to borrow?
- Term: How long you need the loan for and when do you foresee repayment?
- Repayment: how much can you afford to pay to the financier?
Depending on the mix of these three then you will be looking into a particular product, how to think about this?
1. Materiality: if the loan is bigger than 1.5M AUD then chances are the best bet you have is going to a big 4 bank as they are able to cope with the cash outflow without needing to compromise a large part of their portfolio. If it is smaller then companies such as Avila can help you out, meaning tier 2,3 and small lenders might be a better fit.
2. Term: the longer the term the bigger the institution, i.e if you want a loan for 5 years, then a strategic loan will be best, these are normally offered by big institutions. However, if you want a 6-month loan then a smaller lender will be a better option.
So what are the products:
- Business Loans: Business loans are normally the first idea business owners think of when needing outside capital, the tricky part is that business loans are heavily regulated and sometimes are either very hard to get or very expensive (or both). However, if you have a company that has been financially solid for 3 years, and you can show that the cash flow deficit is due to growth as well as that the company having a solid balance sheet then getting a business loan might be your best shot if you want a debt kind of financing.
- Personal Loans: Personal loans are products that are a more accessible one because you are guaranteeing the repayment of it personally (the bank will give you the loan, not your business), which means that you will need to make sure you are able to repay the amounts if your business cannot. The good thing is that these are more accessible and so common that they can be quite competitive. However, personally I don’t recommend personally guaranteeing a loan for your business.
- Trade and Supply Financing: this way of financing your business is not a debt driven loan, but rather a working capital driven one. Let me explain, either receivable financing or supplier financing are products that work by financing your current invoices (either pending to be received, or pending to be paid), this allows you to know that you are going to be able to repay the loan because it is tailored to your business. We recommend this for companies that are growing and want to finance the growth without having to go through banking hassles.
- Overdrafts: overdrafts work the same way as a business/personal loan, however you don’t get the cash, you simply have a limit in which you can use the bank’s money for a short term period of time to fix yourself up. This is a good resource to have for support but we don’t recommend it as a way to finance your business for more than 2 weeks.
- Credit Cards: credit cards are a very expensive way of financing your business/life. The reason is that first, the interest rate is huge. Secondly, they are made to be repaid on a 15 years basis. I.E. You will be charged interested at huge proportions. The only way I could recommend using a credit card is to buy something now that you know you can fully repay within 30 days.
Now that you understand your projected cashflow, what kind of loan you are seeking as well as what products are out there, you can compare different financiers and apply for the loans/facilities.
To compare loans head to Finder
Don’t forget to have a read through our credit score management blog to make sure you are on top of it whilst applying for financing!