Using Short-Term Financing To Manage Cash Flow Fluctuations

Has your business ever struggled with cash flow shortages? It's a common challenge that most businesses face at some point. Fortunately, short-term financing is a great solution to help you navigate growth, seasonal changes and unexpected events. It acts as a strategic buffer to smooth out your cash flow fluctuations and keep your business on a steady path to long-term success. Let's explore the key benefits of short-term financing and how the various options can help you manage the inevitable peaks and valleys.

Maintaining Cash Flow Stability

Short-term financing acts as a crucial safety net, providing quick access to funds to help with cash flow fluctuations. Many situations can strain a business's cash, and here are some of the most common:

• Growth: When your business lands big projects, gains new customers or sees increased demand, you often need to invest upfront in equipment, inventory, supplies or labor. However, you might not receive payment until the work is delivered. This new opportunity can tie up cash and make it harder to cover daily operating expenses. Short-term financing can bridge this gap, allowing you to take on new business and keep your operations running smoothly.
  
  
• Seasonality: Many businesses have seasonal highs and lows in revenue. You'll incur costs to prepare for peak periods, even when revenue is scarce. Short-term financing helps you cover these expenses until your busy season arrives and payments come in.
  
  
• Inventory: Suppliers often offer discounts for large purchases. Taking advantage of these deals might require more cash than you have on hand, potentially impacting your daily operations. Short-term financing can help you seize these opportunities. Additionally, as we saw during the COVID-19 pandemic, supply chain disruptions can cause delays, price increases or make it hard to get certain materials. Short-term financing can help you make larger, proactive purchases to ensure you have the inventory needed to meet customer demand on time.
  
  
• Receivables: Your customers' payment habits may change due to their own challenges, uncertainty or cash flow cycles. This can delay your payments, potentially making it difficult for you to meet your own obligations. Short-term financing can alleviate these payment delays, helping you stay current on your bills until your customer payments come through.

As the saying goes, cash is king. Having access to it gives your business valuable breathing room, allowing you to stay focused on what matters most: running your business.

Short-Term Financing Options

When it comes to managing cash flow, one size doesn't fit all. Here are several short-term financing tools available to small businesses:

• Revolving Line of Credit: Will you have a continuous need for funds? This loan option is common for many businesses, especially if you have inventory and/or accounts receivable. You will get approved for a certain credit limit that you are allowed to borrow against, pay down and re-borrow continuously. This loan typically requires monthly interest-only payments based only on the outstanding principal balance on the credit line. If there is an outstanding balance, that principal can be paid down as your cash flow allows. This is usually placed on a one-year term and is reviewed annually for renewal, if requested.
  
  
• Non-Revolving Line of Credit: Do you need funding for a specific project or order? This loan option provides a specific credit limit, but unlike the revolving line of credit, it cannot be re-borrowed against. Each time you draw from the loan, the amount available for future draws decreases. You'll make monthly interest-only payments on the outstanding balance, and the principal becomes due when you get paid for that specific project or order.
  
  
• Business Credit Cards: This is the quickest and easiest option. However, they have a much smaller limit than revolving line of credit and non-revolving line of credit and typically come with a higher interest rate. These are often used for smaller day-to-day expenses. Many business credit cards offer rewards or perks that can be used and benefit your business.
  
  
• Trade Credit: This isn't a bank loan, but it's a potential short-term financing option if provided by your suppliers. You would want to discuss this directly with them. It would allow you to receive goods, but payment is not required until a later date.

How To Apply For Short-Term Financing

When considering short-term financing, clearly define how much funding you’ll need. Lenders often work with you to align the loan amount with the purpose of the funds and determine the appropriate structure. They'll also need to understand the financial health of your business. Common financial documents include:

• Business Information:
  • Tax Returns: 3 years of business tax returns.
  • Financial Statements: Most recent year-to-date income statement and corresponding month-end balance sheets.
  • Debt Schedule: A list of your current outstanding debts.
• Personal Information:
  • Tax Returns: Past 3 years of individual tax returns.
  • Financial Statement: An up-to-date personal financial statement.

Commercial lenders also understand that your time is valuable and often strive for a streamlined process. By gathering key financial and legal documents upfront, you can help expedite the application process.

Additional Funding Resources

You're not limited to traditional banks when seeking short-term financing. Explore local organizations offering micro-loans, which can be an option if your business is just starting out or doesn't yet meet standard lending criteria. Plus, there might be specialized programs in your area tailored to your specific industry, like manufacturing or farming, that offer unique financial support.

You can also access government-backed SBA loans designed to address your immediate cash flow needs with more manageable repayment plans spread over a longer period. This means you can secure the working capital you need now for things like inventory or short-term projects and pay it back over several years, rather than facing a large lump-sum payment.

Building a relationship with your local commercial bank provides you with trusted guidance. Your banker can help you navigate these various options and connect you with the resources that best fit your business needs and goals.

Common Mistakes To Avoid When Using Short-Term Financing

While short-term financing can be a valuable tool, it's important to understand the risks. Remember, you usually need to pay the financing back within a year. If your business has busy and slow times, and you use a loan, have a clear plan for how you'll pay it back when things pick up.

Also, keep an eye on the money you borrow. Lenders often check how you're using a certain type of loan to make sure it matches what you said you'd use it for. For ongoing credit lines, don't borrow more than you can comfortably pay back. Lenders will also check in from time to time to see if the loan still makes sense for your business.

Watch out for relying too much on short-term loans. If you're always needing to borrow money to cover everyday costs, it might be time to look at how your business is operating and try to better match your income with your expenses. Planning ahead with a cash flow forecast can help you see potential money problems before they happen.

Every small business has its obstacles. But by understanding how short-term financing works and the different ways it can help, you can handle these changes with more confidence. Ready to get started on a short-term loan? Reach out to a commercial lender today and be prepared if this problem arises.