As you grow your business, it’s important to keep one eye on the bottom line and the other on your bank account balance. You have inventory to buy, payroll checks to cut, and equipment to purchase. With all of these drains on your bank account, you might need a cash infusion to stay afloat. There are a number of different ways to fund your short or long term cash flow needs, but you need to seek out the best fit for your business.
Here’s how to find the right funding source:
- Determine the nature of the shortage.Is the need short term or long term? Short term cash shortages could be the result of recurring, seasonal swings. If you need to make a large investment in October to buy inventory you will sell in November and December, you have a short-term need. If, on the other hand, you need to buy a piece of equipment so you can increase your production by 10% over the next five years, you have a long-term need.
- Compare your financing options.
|Type of Funding||Short or Long Term||Repayment||Security|
|Line of credit||Short-term||Interest only is paid over the term of the loan, principal repaid on demand||Generally unsecured|
|Mortgage loan||Long-term||Principal and interest repaid over a specified number of years||Secured by the associated asset|
|Factoring – lender advances funds against the outstanding balance of your accounts receivable||Short-term||Repaid by your customers directly to the factoring company||Secured by accounts receivable balances|
|Leasing||Long-term||Repaid monthly||Secured by the asset—agreement could include an option to buy at the end of the term|
|Equity investment- a partner contributes capital in exchange for a share of your equity in the business||Long-term||Repaid upon the sale of the business||Secured by a percentage of your business profits and net assets|
- Match the need with the right type of financing.Try to fund a short-term need with a short-term loan and long-term reserve debt for investments that will add value to your business over time.
- Other considerations.When comparing your financing options, consider the repayment terms, any required security, loan covenants, and the relative interest rates charged. Ask about regular reporting requirements and any special supplemental information you need to disclose to the lender. You may also want to consider your relationship with the lender and the nature of the loan application process. Be sure to ask about any other fees that might be charged.
No matter how rosy your cash flow is today, always have a plan for covering your future cash flow needs. You want to have plenty of options if the need arises. No one wants to find themselves in a crisis that leads to high aggravation and potentially higher costs.