Entrepreneurs are faced with important financial decisions every day. Developing a deep understanding of your finances is crucial to seeing your business thrive. An important financial concept to understand and take advantage of is cash flow forecasting. Read on to learn about what cash flow forecasting is, and why it matters.
What Is A Cash Flow Forecast?
Cash flow forecasting is the process of estimating the flow of cash in and out of a business over a specific period of time. It is an essential business planning tool, helping companies prepare for future cash scenarios and efficiently manage cash flow. Ultimately, forecasting helps you determine how you’ll run and grow your business effectively.
The Advantages of Cash Flow Forecasting
1. Prepare for the unexpected
Cash flow forecasting protects businesses from unwelcome surprises, such as employees leaving or expected deals not panning out. Using scenario planning allows you to test for possible futures and better prepare for possible outcomes. You’ll be better prepared to roll with the punches and develop strategies to deal with the unexpected.
2. Track Spending
Forecasting allows you to see the breakdown and impact of your budgeting. Whether over or under budget, seeing the movement of cash into and out of the business can help to increase accurate budgeting and meet future revenue goals.
3. Overdue Payments
It’s important to keep track of late payments and how they impact your bottom line. You can also plan for upcoming cash gaps and put a plan in place before they become an issue.
4. Manage Surplus
Knowing when you’ll have surplus cash means you’ll be able to manage it wisely. Using additional cash for reinvestment in new markets, or for the repayment of loans, can be essential to helping your business thrive.
5. Predictable Growth
Cash flow forecasting fosters predictable growth. Since cash flow forecasts help businesses plan their cash surpluses more effectively, they also make it easier to execute a growth strategy in a more predictable way and avoid costly surprises.
6. Debt Repayment
Debt repayments are often large cash outflows that need to be planned for. Cash flow forecasting can help businesses that are in debt ensure they have the cash on hand to make those payments each time they’re due.
Business Consultants & Financial Experts
We pull from our expertise in business financing and entrepreneurship to deliver high impact solutions for businesses of all sizes. Whether you need help improving your business’ financial health, applying for a loan, or refining your business plan, we can help. Schedule a consultation to get started.
No matter the size of your business, you’ll likely require extra capital at some point in your entrepreneurial journey–whether to boost your cash flow, hire new employees, or scale your business to the next level. There are many business financing loans available, each with its own qualification requirements, interest rates, and terms. The right one for your business will depend on when you need the money and what you need it for.
When you’re ready to apply for business financing loans, doing your homework ahead of time will make the process easier down the line. By understanding all of your options, you’ll be more prepared to ask for an offer that meets your business’ unique needs. It also helps you learn why interest rates are higher for certain high-risk types of loans.
Here’s an overview of the six most common business financing loans, and who they’re best for.
1.) Conventional Loans
Conventional bank loans typically have fewer hoops to jump through than SBAs, with a shorter approval time. They are issued by banks, credit unions, and financial institutions. To qualify for a conventional business loan, you must have a good credit score and favorable business financials.
2.) SBA 7A Financing
SBA 7A Loans are intended for use by borrowers that fall short of approval for a conventional loan. An SBA 7a loan can be used by startup companies, companies that do not have a strong balance sheet, and transactions that do not include real estate. SBA 7a loans will have longer terms and amortization lengths than conventional loans.
3.) SBA 504 Financing
SBA 504 loans provide long-term financing (up to 25 years) for major business purchases like real estate, equipment, and machinery. Loans are typically capped at $5 million, but some projects can qualify for up to $5.5 million.
4.) Private Money Financing
A private money loan is usually a short-term loan used to purchase or refinance real estate. It’s primarily used for real estate investment acquisitions. Loans can be interest only and terms range from one to five years.
5.) Asset Based Lending
Asset-based lending is secured by some form of collateral such as inventory, equipment, accounts receivable, and other balance-sheet assets. This type of financing is best suited for a business that has assets but lacks the cash flow to expand the business or get through a cash flow emergency.
6.) Equity Investment
Often, especially with a startup, there is insufficient capital on hand to inject into the project. Bringing in an equity partner that injects capital in exchange for a percentage of ownership in the company is a great way to raise capital.
We’ve Been There So You Can Get There
When it comes to getting funding, you’re not in this alone. Independence Business Consulting understands the challenges facing small business owners when it comes to getting the capital they need. We have decades of experience consulting and securing funding for businesses, and our experts are ready to guide you through the business financing loan process. Partner with us to find the best solution for your business.
Outside funding can give your small business the boost it needs to grow and thrive. With that said, finding the best funding option will depend on several factors, including why you need the capital, when you need it, and your business’s overall qualifications. Here are the four most common financing options for small businesses.
1.) Personal investments
There are several ways you can use personal money to fund your business, although they carry risk as you’re utilizing your personal assets. One way is through cash savings. If you have money set aside in a savings account or investment portfolio, you can finance your business without any debt.
Personal loans are another option, especially if your business is young and you may not meet the qualifications for a business loan. Alternatively, your friends and family may be willing to invest in your business in exchange for an ownership share. However, it’s important to consider the effect this may have on your personal relationships, and loans from friends or family should include established agreement terms.
2.) The SBA
The U.S. Small Business Administration offers lenders a federal guarantee on your loan, making it less risky for them to lend you the capital you need. There are multiple types of SBA loans available, including SBA 7(a) loans, SBA 504 loans, and SBA microloans. They can be used for a wide variety of purposes and are available in amounts up to $5 million.
SBA loans are best for businesses that don’t meet traditional banks’ strict lending criteria. They can be easier to access, but you’ll still need a good credit score, strong annual revenue, and at least two years in business to qualify.
3.) Large national banks and small regional banks
Traditional banks are a good starting point and can help you figure out where you stand when it comes to qualifying for a loan. Types of small-business financing offered by banks include term loans, business lines of credit, equipment loans, and commercial real estate loans.
Bank loans typically have low interest rates and competitive terms, but can be hard to qualify for. They are best for established businesses with collateral and strong credit. Big-name banks offer a variety of loan options, but don’t be surprised if they turn you away. Local banks may be a better resource for small business owners because they have a stronger interest in the development of the community.
4.) Alternative lenders
Instead of banks or credit unions, alternative lenders are typically online-based, private companies that operate like the lending arm of a bank. Whereas bank loans are traditionally difficult to qualify for, alternative lending is more flexible and accessible, although they may have higher interest rates.
Here are some of the most popular alternative lenders and who they’re best for:
- Fora Financial: Best for bad credit
- Bluevine: Best for a business line of credit
- OnDeck: Best for short-term loans
- Fundbox: Best for quick approvals
- Taycor Financial: Best for equipment financing
- Funding Circle: Best for affordable, fast, longer-term loans
We’ve Been There So You Can Get There
When it comes to getting funding, you’re not in this alone. Independence Business Consulting understands the challenges facing small business owners when it comes to getting the capital they need. We have decades of experience consulting and securing funding for businesses, and our experts are ready to guide you through the process. Partner with us to find the best financing options for your business.
Here at IBC we get a lot of questions about different types of financing and there are many ways to get financed. Here are two of the financing sources and the pros and cons with each.
Equity financing is the process of raising capital through the sale of shares in an enterprise. Equity financing essentially refers to the sale of an ownership interest to raise funds for business purposes. For most new businesses this comes in the form of “partnership” with friends and family in exchange for the money needed to start the business.
A simple way to look at it is this. If your friend “lends” you money with the expectation that you will pay it back, with our without interest, that is debt financing, if your friend gives you money to start the business with the understanding that he now owns a percentage of your business, that is equity financing. There are investors such as angle investors and venture capital funds that will make equity based investments as well. Check out some of the pros and cons.
Pros of Equity Financing
- You can use the money raised from investors for all the start-up costs instead of making large loan payments to banks or other organizations or individuals. You can get underway without the burden of debt payments. This can be a real benefit when you need a longer runway to start generating revenue.
- Depending on who your investors are, they may offer valuable business assistance that you may not have. This can be important, especially in the early days of a new business. A new business often begins with a great idea but the person with the great idea might not have the business experience necessary to run a business. Taking on a equity partner that can also fill your skill gaps should be a consideration.
Cons of Equity Financing
- Remember that your investors will actually own a piece of your business; how large that piece is depends on how much money they invest. You probably will not want to give up control of your business, so you have to be aware of that when you agree to take on investors. Investors do expect a share of the profits so when the business starts making money they will want to get paid.
- Since your investors own a piece of your business, you are expected to act in their best interests as well as your own, or you could open yourself up to a lawsuit. In some cases, if you make your firm’s securities available to just a few investors, you may not have to get into a lot of paperwork, but if you open yourself up to wide public trading, the paperwork may overwhelm you. You will need to check with the Securities and Exchange Commission to see the requirements before you make decisions on how widely you want to open up your business for investment.
This is where most of our clients end up getting the funds they need to start and expand their businesses. If you decide that you do not want to take on investors and want total control of the business yourself, you may want to pursue debt financing in order to start up your business.
The myriad of options in the debt based financing space is vast and can be confusing. Most new business owners start by tapping into the sources that they are familiar with first by using personal loans, home equity loans, and even credit cards, 401k loans etc. Sometimes they reach out to family or friends when other conventional loan options don’t exist.
Pros of Debt Financing
- Debt financing allows you to have control of your own destiny regarding your business. You do not have investors or partners to answer to and you can make all the decisions. You own all the profit you make.
- If you finance your business using debt, the interest you repay on your loan is tax-deductible. This means that it shields part of your business income from taxes and lowers your tax liability every year. Your interest is usually based on the prime interest rate.
- The lender(s) from whom you borrow money do not share in your profits. All you have to do is make your loan payments in a timely manner.
- There are a lot of options and the US government has some great programs to help support new businesses.
Cons of Debt Financing
- The disadvantages of borrowing money for a small business can be significant if you are not careful. Business owners often want something so bad they take a loan that is not right for their business. For example, you may have large loan payment due at precisely the time you need funds for start-up costs. If you don’t make loan payments on time to credit cards or commercial banks, you can ruin your credit rating and make borrowing in the future difficult or impossible. If you don’t make your loan payments on time to family and friends, you can strain those relationships. Being realistic about the debt you take on is critical.
- For a new business, commercial banks may require you to pledge your personal assets before they will give you a loan. If your business goes under, you will lose your personal assets. Understand the terms of your loan and be sure of the repayment strategy. There are literally thousands of options for debt financing with different terms. Know your repayment thresholds and don’t settle for something that puts your personal assets at risk.
- Any time you use debt financing, you are running the risk of bankruptcy. The more debt financing you use, the higher the risk of bankruptcy. Calculate the debt to equity ratio to determine how much debt your business is in compared to its equity is critical.
So the question is, which options are right for you?
It depends on the situation. Your financial capital, potential investors, credit standing, business plan, tax situation, the tax situation of your investors, and the type of business you plan to start all have an impact on that decision. The mix of debt and equity financing that you use will determine your cost of capital for your business. The good news is, there are a lot of options and that bad news is there are a lot of options. Getting the right funding is absolutely critical to the long-term success of your business so make sure you get it right. Do you homework, find the right investors and right lenders, and if you have not been through the process before, find someone that has been through it to help you navigate the options.
There is nothing worse than a great business idea that dies on the table because of a mistake on a loan application. We have seen this many times. The reality is that dreams take money and raising capital often comes down to how you present your idea and present your ability to execute on a plan to deliver it. The good news is that bankers and financial institutions really want to lend you money. That is what they do and how they make a living, but in order to lend they need to have confidence that you will pay them back. If your aim is to expand your business, financial institutions will want to know if the business they are funding is able to repay the loan or can sustain itself in the near future. Below are a few of the biggest mistakes we have seen small business owners make when applying for a business loan.
1. Cooking-the-Books – A common mistake that business owners make when seeking a loan, is exaggerating the numbers. Any financial information regarding your business should be clear and tangible. Here at IBC we see a lot of application turndowns in which a small business owner has exaggerated figures. Often this is an honest mistake that occurs when the owner is guessing at the numbers and not really sure of the actuals or simply “rounding up” in order to please the bank forgetting that a bank can still verify the information on your application. All this does is affect confidence and lead to loan denials if the verification process shows different figures from what you submitted. It is good to be accurate with the information that you fill in the loan application forms even if their willingness to loan is at a lower amount. If you want to increase chances for loan approval, present accurate balance sheets, cash flow statements and any other relevant documents requested.
2. Clear Intent – Lenders want to know exactly what you plan to spend the money on. If you are not sure or it is unclear, that is a recipe for rejection. Any banker worth his salt will want to know how any loan applicant intends to use the funds to improve their business. Unfortunately, one of the most common thing we see from business owners is failure to clearly describe how they plan to spend the money they are requesting. This leads to loan denials by most lenders since a lender wants to lend you money so that you can increase the revenues of the business and be able to repay back the loan with interest. Banks want you to spend money on the right things that will improve your current business’ position. The lender wants to see the needs of your business and evaluate whether the money to be borrowed is enough to meet those needs. You will also want to be brief and to the point when describing your needs and how these funds are going to help you start your idea or expand your business.
3. Run Your Credit Before They Do – The mistake of not knowing your personal credit ratings before applying for a loan may lead to a loan denial. The credit reports clearly outline how dependable are you when it comes to payment of bills and any debts. The figure can tell whether someone can trust you with their money or not. The good news is that the higher the credit rating you have, the higher the chances for your loan to be approved. Knowing what blemishes you have on your credit will allow you to start cleaning them up in preparation for funding, and in some cases allow you the time to preemptively develop a explanation for the negative marks. It is never good to be confronted by a lender with a credit problem that you are unaware of.
4. Have a Business Plan – Remember, your banker will need to get approval from a board or a supervisor to make your loan happen. So you need to arm him with a solid understanding of your business. A business plan is a great way to do this. You should have a road map that clearly shows how you want to operate your business for growth purposes. The business plan should then be submitted along with your applications.
In short, you have to show the lender how injecting money into your business will be able to generate more revenue. Understanding your market, your costs, your breakeven points etc. will build confidence in the lender and increase the likelihood of the loan approval. A proper business plan should include the target market and the goals of the business, as well as expected future growth.
In Summary, lenders are looking for consistency and thoughtfulness on the part of the borrower. Of course the underwriters are going to review the numbers to make sure the loan meets the institutions risk profile but don’t let these four simple things stall the process before you even have a chance. Know your numbers, have clean intent and state your needs clearly. If you do that, you will be on your way to achieving your dreams!
Bankers want to lend but just like stock fund managers, banks are filling a portfolio and like a stock portfolio investor looks to fill his portfolio with certain types of stocks, commercial lenders are doing the same thing. Some focus on manufacturing or medical while others are looking for commercial real estate the list goes on. Lending institutions are investors and they look to round out their holdings. Like any good business, lending institutions also specialize in order to do a great job delivering a product. For banks, loans are their product. There are many different types of loans with different risk profiles and each lender has a formula for maximizing their investments. For example, some financial institutions have specialized on SBA lending (government back lending) others in asset or merchant based lending. Some banks are very aggressive while others maintain a conservative position. Understanding this dynamic is important because it can be the difference between success and failure. If you fail to take this into consideration you might end up with a loan but it might not be the best funding option for your business.
How does this happen? Let’s analyze it. When you approach a bank that, let’s say, focuses on SBA lending it is highly likely you will end up in a SBA loan. If you fill out a form on a Merchant Lending site you will most likely get a merchant back loan. We work with a lot of great banks and fantastic bankers they are all going to do their very best to get you the funding you need. It’s not nefarious, it is optimistic. Bankers are optimistic and are going to figure out a way to get you the money you need – to find you the best possible product that they (with emphasis on THEY) can offer you, but it is your responsibility to look at the options in the industry and to figure out what is the best option is for your business.
Borrowing money is a big decision and should not be done on a whim or without significant consideration. I talk to business owners every day that shop three, four, even five different suppliers to save a few bucks on cleaning supplies but walk into the first bank they come across and sign up for a loan. It does not make sense to put the due diligence into your cleaning service and not into your funding sources. Yes, it is time consuming and at times confusing, but perseverance is crucial. Getting the right loan can be the difference between barely surviving and financially thriving.