Lynn Johannson, Advisor, Sustainability and ESG
January 4th, 2024
Lynn Johannson, President of E2 Management Corporation and Catalyst for THE Collaboration
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How To Leverage Business Loans To Boost Your Cash Flow
Feb 27, 2024
Steady cash flow is essential for all businesses, established or startups. Without enough cash on hand, you may struggle to cover operating expenses, invest in growth, or take advantage of new opportunities.
When in need of financing, many business owners turn to business loans to boost their working capital. These loans provide the finances they need to smooth out cash flow fluctuations, finance large purchases or projects, and consolidate high-interest debt.
This article explores how you can strategically leverage business loans to improve your cash flow situation. Read on!
1. Understand Your Cash Flow Needs
As a business owner, you must understand your cash flow needs before considering any loans. Analyze your monthly cash flow statement to reveal when you have the most cash coming in versus when you have significant outgoing expenses. This cash flow cycle likely has highs and lows at different times of the month or quarter.
Identify if there are periods where a quick influx of funds from a short-term loan could help ease the pressure of temporary low cash flow and propel you into a favorable position again. During these periods, consider exploring services from Credibly or other financial providers providing small businesses with flexible loans to avoid negative cash flow.
For instance, you can use a short-term cash flow loan to bridge the gap between your monthly rent due date and your upcoming revenue peak. This helps you avoid late fees or other penalties, allowing you to focus on core business operations without cash flow disruptions.
2. Choose The Right Type Of Loan
Business loans come in various forms, each with its own set of terms, interest rates, and repayment structures. To leverage them effectively, you must understand their terms and select the option that aligns with your business needs and cash flow patterns.
The principal loan types to consider include the following:
- Line of credit: A line of credit provides flexible funds up to a set limit so you can cover costs as needs arise. The best part is that you pay interest only on the amount used, making it an affordable way to manage cash flow fluctuations. Consider hiring Credibly to help assess your needs and offer flexible lines of credit or fast funding options that meet your specific needs.
- Terms loan: As you grow your business, you may need a large lump sum for significant purchases like new equipment or office renovations. This is where a term loan can help. It provides the total amount upfront and allows you to repay it in fixed installments over a set period, usually 1-5 years. This will enable you to make significant one-time investments that may take your company to the next level.
- Inventory financing: Inventory financing provides access to capital for purchasing and carrying inventory. This enables you to maintain maximum inventory levels to meet customer demand and frees up your funds to cover other operating expenses. Also, you only pay interest on the amount borrowed to buy inventory.
- Invoice factoring: Invoice factoring provides immediate cash flow by selling your unpaid customer invoices to a financing company at a discount. This company advances you a percentage of the invoice amount, often 70-90%, and then collects payment from your customers. The remaining balance, minus fees, is given to you once the client pays the invoice in full.
These are some of the conventional business loans available in many banks and lending institutions. You can also consider alternatives to traditional loans, such as Small Business Loans (SBA), merchant capital loans, and crowdfunding.
3. Develop A Strategic Repayment Plan
When taking a business loan, develop a strategic repayment plan tailored to your revenue streams. Review cash flow projections and account for seasonal dips or spikes. A restaurant, for example, may earn less in the winter months.
With slower revenue, larger loan payments could burden the business. Consider this seasonality when choosing ideal repayment terms and factor in expenses like payroll and inventory purchases that impact cash flow.
Ultimately, select loan terms that align with your financial forecasting. If possible, make lower payments in the slower months and higher payments when your business is at its peak. An adaptable repayment schedule demonstrates financial responsibility without squeezing your cash flow.
4. Evaluate The Cost Of Borrowing
When considering a business loan, you must thoroughly evaluate the costs to make financially sound borrowing decisions. Look beyond the interest rate and examine the fees, repayment timeline, and Annual Percentage Rate (APR) to gauge the total cost.
Origination fees or prepayment penalties add to your expenses. Conversely, a longer repayment term may lower monthly payments but increase interest costs over time. For instance, a USD$50,000 loan at 6% interest would cost USD$55,000 over five years and USD$70,000 over ten years. Therefore, understand how these business loan repayment terms impact your cash flow long term before settling.
Conclusion
Leveraging business loans to boost cash flow is a strategic decision that can impact the trajectory of your business. You can ensure that borrowing serves as an effective tool for growth and financial stability by carefully assessing your needs, selecting the correct type of loan, understanding the costs involved, and developing a strategic repayment plan. Remember, the goal is to increase cash flow and invest wisely in opportunities that enhance your business's profitability and long-term success.
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