When you're seeking out money to get into business for yourself, you're going to enter a whole new world of numbers. Your loans, mortgages, lines of credit, and credit cards will come with various interest rates and APRs attached, and you'll need to know what all of those numbers mean, or you'll be caught by surprise when you have to start making the payments. It's a good idea to sit down with a financial adviser before you start taking out loans and signing up for credit for your business. You need someone who speaks the language of finance on your side.
A big part of the American dream is owning your own business. Having a good job with a steady paycheck is a good thing, but most people, at one time or another, dream of being their own boss. Unfortunately, owning a small business comes with many pitfalls and more than half of all small businesses fail within the first five years. One of the most critical and dangerous of these pitfalls is failure to properly plan for the cash flow needs of the business.
What is Cash Flow?
Cash flow is the difference in the amount of cash that a business has at the end of a time period (usually monthly) as compared to the beginning of the period. If the cash flow is positive, then the business brought in more cash through sales than they spent on expenses.
While this definition of cash flow seems simple, it can actually be quite complex due to such business practices as selling on credit or taking extended terms on paying bills. When using accrual basis accounting, a sale of a product on credit would be included in overall sales and, if expenses are in line, the business could show a good profit on their income statement. The problem is that until the customer actually pays the bill, there is no money with which to pay expenses such as payroll, rent, etc.
The Role of Business Loans
In order to make sure there will be sufficient cash available to cover the expenses, the business owner has to analyze the expected cash ins and outs and then plan accordingly to make sure there is enough. Because the situation where a credit customer may not pay for a while is very common, business owners often used business loans of various types from money services companies, like Bank & Trust Company, to make sure the cash needs are met.
The most common loan solution for this need is an operating line of credit. Under such a line, the business owner has a certain amount of money the business is able to borrow whenever they need to and then pay it back as they receive payments from their customers. As the owner pays the borrowed funds back they are immediately available to be borrowed again should the need arise. Although this is similar to a credit card, the bank or other lender providing the line will typically require collateral of some sort to secure the line.
As part of owning and operating a small business it is important that the owner develops a good relationship with a business banker who can help them understand what business loan products will be most appropriate to make sure the business always has plenty of cash available.
Share7 August 2015
