Snow Business, December 2014

Cool cash Capitalize your business wisely by balancing financing options BY DOUGLAS FREER CSP Contributor R egardless of how profitable your business is on paper without cash your business will starve if you are unable to meet payroll and vendor obligations Most businesses fail because they are undercapitalized Managing and preserving your cash is an important part of running your business You can use various methods to help improve your cash flow see sidebar including various financing options Ideally you will have your cash in place before you need it since getting a loan when you desperately need one is going to be more difficult Why finance Financing provides you with access to cash to meet your short and long term business objectives If you were forced to buy everything with cash on hand you may not be able to ramp up as quickly to take advantage of a new opportunity For example you may need several trucks for a new contract that will pay you over time for your services but you need the trucks today to meet your commitment You can use an equipment loan that is structured over a set term so you get the trucks you need while repaying the amount you owe over a period of time At the beginning of the snow season you are spending more money on equipment materials and readiness labor than you are bringing in from your contracts What if winter arrives early and requires high payroll and material purchases to service your clients Do you have the cash to pay your workers and vendors If your customers pay in 30 to 60 days from when you invoice you could be working in November and not getting paid until January or later Without sufficient savings a line of credit allows you to borrow money to meet payroll and pay your bills until your customers pay you Types of financing An upstart business may finance using personal lines of credits credit cards and personal loans while a more established business with history and resources may be able to negotiate an asset or receivables based line of credit Credit cards and vendor accounts with 30 day terms are simple forms of short term financing that allow you to hold onto your cash by buying today but paying next month Private financing is an option if you have friends or family that are willing to loan you money however this can be tricky and it is best to set up a written agreement with a payment schedule to formalize the loan and terms of the agreement to avoid misunderstandings There are different types of financing options from banks or traditional lending institutions An asset based loan for equipment or property will be different than a cash based loan for working capital and short term needs When borrowing from the bank it will evaluate your request for funding differently based on what you are requesting and what your financials look like Typically asset loans are considered long term money more than one year and cash loans are generally used for short term needs less than one year like payroll inventory and other direct cost expenses A few years back when banks began tightening lending standards small businesses particularly new businesses found it difficult to get funding Options like CAN Capital offer small business loans with short turnaround time frames Amazon and PayPal have recently entered the small business lending market Peer to peer websites like Prosper and Lendio provide a process to partner investors with borrowers Peer to peer lending can be less expensive than bank loans because it eliminates the middleman the banks and their overhead Often though loans are made to individuals rather than businesses and will thus show up on the owners personal credit report Traditional banking formulas Lenders will use a proprietary formula to determine the risk in the proposed loan They will look at a number of factors including the reason for the loan the business owners personal credit business history and financial ratios Financial ratios such as the loan to value debt ratio debt service coverage ratio current ratio acid ratio and others are used to compare your companys financial health with expected norms for your industry Falling outside of acceptable parameters will raise red flags and without a suitable explanation you may be considered a less desirable risk Criteria to evaluate whether you are an acceptable risk may change or become more stringent depending on the economy as banks work to mitigate unnecessary risks The target becomes narrower and more challenging to hit as scoring tightens Maintaining good financial ratios and a Continued on page 28 26 SNOW BUSINESS DECEMBER 2014 www GoPlow com