Sufficient cash flows to enable a business to function at optimal levels during a financial cycle is paramount. Whether you have a seasonal business, are anticipating higher sale volumes during holidays or when you need just a little bit of assistance getting through those slower months until the crowd comes in, every business requires additional capital at times.
The most popular ways used by businesses include overdrafts and short-term business loans. Every business owner must evaluate within his own operational context when the best time would be to undertake external financing. Set out below, we will explain some of the benefits of financing within two different situations:
In the first instance, the need for financial assistance arises due to prolonged periods of low to no revenue, with a seasonal spike that accounts for the majority of the business’s revenue for a set financial year. This instance also refers to new product lines or services being developed. In these instances, costs like rent, labour costs, marketing and product acquisition or development still has to be incurred in order to ensure that the business can realise the revenue available in the busy season or when the new product is released for sale. Because of the timing difference between the cash flows, it can be difficult to fund these costs. A short-term loan or an overdraft facility would help manage cash flows until revenue is realised.
In the second instance, the need for financial assistance arises during the busy season of a business, when demand exceeds the number of employees and products available for sale. In this instance, competition also usually peaks, and marketing must be done in order to ensure an edge over the business next door. Whether it is to hire contract staff for the duration of the busy season, engage in additional marketing campaigns or to boost the inventory level available for sale, additional financing could help ease your mind during these busy periods and with the resultant revenue realised, the financing can be repaid as income is earned.
In both instances, an application for financing needs to be submitted well in advance, in order to ensure the funds are approved and available when the need for these funds arises. Proper budgeting and market research, therefore, play an integral part in the timing of financing in a business, as it provides clear insights into the amount of financing that is needed, and when it is needed.
It is important to note, that certain scenarios may arise when business financing might not be the right thing for you. If you are a new business and you do not have any collateral in the business or established revenue streams, or if you are an established business and you are still repaying the business financing from the three preceding seasons due to lack of revenue, it may be that equity investment would be an ideal fit for your scenario.
The instances, as explained above, does not include all scenarios where business financing should be considered. Every business is unique and has unique financing needs. It is therefore imperative to understand your business, the effects of financing and your business’s own financing appetite.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)