Managing cash flow is an important part of any business, maybe the most important. If you run a small business, your success will be determined by how your money moves. You will find it easy to grow strategically if you have sufficient information about how money flows in and out of the business. Unfortunately, things do not always go as planned because of a myriad of challenges in the business world. You could incur losses or spend a lot of money on things like delivery, advertising campaigns, salaries, etc. Also, some businesses get into trouble because of late-paying customers, unexpected expenses, and bad business plans.
The truth is that money will not move according to your expectations, and you will not be able to keep your business afloat if your cash flow dries up. A small business loan may help if cash is no longer coming into the business. Read this article to find out how to maintain and manage positive cash flow with the help of a small business loan.
Understanding Cash Flow
Before we talk about business loans, it is important to understand what cash flow means. In simple terms, it refers to the amount of money that flows into and goes out of your business. There are two kinds of cash flow: positive and negative. If you do the math correctly, these two will tell you whether your business is heading the right or the wrong way.
Positive cash flow indicates that a business is generating more money than the amount spent on the various costs of running a business such as employee salaries, bill payments, rent, debt payments, and so on. In contrast, negative cash flow occurs when the business is spending more money than the amount of incoming cash. Many businesses experience negative cash flow from time to time due to various factors. For instance, this happens when you make sales and clients delay payments, as well as when you make a big investment that causes a temporary cash shortage.
Why Your Cash Flow Matters
Cash flow helps prospective lenders know your business’s financial capacity before they decide to offer you a loan. If your cash flow is positive, it means that your business has the power to generate enough money to cover all costs and pay back the loan. You can grow your business only by making sure that your cash flow exceeds the amount needed to pay off your debts and fund growth without borrowing. If a lender realizes that you have a negative cash flow, you are unlikely to get a deal.
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How to Manage and Maintain Positive Cash Flow with a Small Loan
There is no need to worry about temporary cash shortages provided that you know how to bring more money into your business. If you run out of cash because of investments or unpaid deliveries, be patient because payments will soon start flowing back to keep your business on the right track. However, what should you do if you are always dealing with cash flow problems, and you can no longer pay your expenses or plan for the future? Well, you should consider taking out a business loan to maintain positive cash flow.
Follow these steps to maintain and manage positive cash flow:
01. Calculate Your Expenses
The first step before you decide to take out a business loan is to know your expenses. As stated earlier, your expenses will play a role in determining the nature of your cash flow. The more you spend on salaries, company vehicle fuel, electricity bills, and other expenses, the higher the chances of having negative cash flow. The main objective of calculating your total expenses is to establish the amount of money you need in order to keep your business running. If you have the right figure, then you know the amount of money you need to borrow from lenders to maintain positive cash flow.
02. Know Your Receivables
Receivables will have a negative impact on your business’s cash flow if they keep increasing. If you notice that your cash flow is negative because some or even most of your customers are taking a long time to pay for the products and services you have already delivered to them, it’s time to pay attention to your receivables. You need to calculate the amount of money your customers have yet to pay and add it to your expenses to get an estimate of the required loan amount.
03. Capitalize on Credit Lines and Take Out a Business Loan
The next step is to take out a business loan to help you maintain the right cash flow. One of the challenges faced by people who run small businesses is that they may not qualify for huge loans or business lines of credit. However, it’s still possible to find lenders who are willing to lend you some cash as long as you meet certain terms and condition. For a new business, consider a business or personal loan depending on your qualifications and the amount needed.
For well-established businesses, look for lines of credit from banks, credit unions, or online sources to cover the gap created by your expenses and receivables. If possible, use your assets as collateral because secured lines of credit generally incur lower interest rates than unsecured ones. Another useful tip is to establish credit lines when your cash flow is positive and adhere to the terms and conditions. In times of need, this will make it easy to convince lenders because they can trust you and lend you money without asking too many questions. As you make the most of business loans and credit lines, remember to reduce your expenses.
All things considered; it is common for businesses to experience negative cash flow. Luckily, it is possible to maintain and manage positive cash flow by capitalizing on business loans and lines of credit. The best way to establish the amount of money needed to keep the money flowing is to analyze your outgoings and pay attention to receivables.