Entrepreneurs who need capital now have plenty of options from which to choose. Yet the breadth of business loan products in the market can make it difficult to determine which is the best fit for your needs. Joseph Brady of Reliant Funding explains how small business owners can approach their search for capital.
Understand your cash flow. Cash flow is important for all businesses. However, it takes on a particular level of importance when you’ve been in business for only a few years. Over the course of that time, you may experience ebbs and flows in demand, realize that your business model costs more money than you expected, or find that clients are slower to pay than anticipated.
When you understand your cash flow trends and prepare accordingly, you’re able to provide your business additional financial flexibility, and avoid falling short on your financial obligations. As you research business loans, you’ll also find that some sources of capital depend on your current cash flow — while others are designed specifically to help business owners access cash flow, when needed.
Conducting a cash flow analysis is fairly simple, and can be done daily, weekly or monthly. Start with your company’s total cash balance at the beginning of the chosen time period. Then, add all sources of money coming in, minus money going out. If the number you end on is positive, you’ve got positive cash flow. If it’s negative, you’re short on cash.
Your cash flow analysis can help you determine how much money your business needs to borrow, too. If you decide to move forward with a business loan or funding line, for example, the amount will fall under your money coming in; the payment you make to the loan gets categorized as money going out.
Determine how you’ll use the funds. If you’re securing a business loan or funding line to grow your business with investments in new products, supplies or materials, estimate how much you need to borrow to purchase what you intend. Some business loans are designed specifically to help business owners invest in future opportunities — whether it’s physical goods, or expansion into new locations or markets. Still, those loans may require a business plan and projections for how the business will perform over the next few years once the funds are put to use. By contrast, some funding options are open-ended — essentially, allowing business owners to choose how they want to use the cash they borrow. Neither type of loan is inherently good or bad, but it should align with your goals for securing funding.
Research your financing options. Once you’ve identified all the ways you’ll use the business funds and how much you think you’ll need to borrow, you’re ready to start researching options. Depending on your needs, you may consider a number of sources including traditional bank loans, a small business line of credit, a business credit card, alternative lenders, Small Business Administration loans — or a combination of several of these options. The accompanying infographic from Reliant Funding can help you determine the pros and cons of each type, and some of the criteria each lender may require of a business loan applicant.
For example, some business loans may require that an applicant have an established credit history, at least three years of sales and operating history, and a formal business plan. Others may be designed to help startups access cash, and base more of the loan decision on the businesses potential, rather than performance history. Identify which types of funding options are best matched to your business to simplify the process of securing the funds you need.
Joseph Brady is Senior Director of Digital Marketing for Reliant Funding, a provider of short-term working capital to small and mid-sized businesses nationwide. He has more than 14 years of experience in B2B digital marketing, optimization and operations, with a focus in the financial services market.