Cash is the fuel that makes a business run. It is needed to pay salaries including your own, fund marketing programs to acquire and retain new customers, invest in equipment and facilities, pay rent, supplies and many more day-to-day activities. Most financial experts recommend three to six months of operating expenses, but using this for every business in every situation is misleading.
To determine how much cash you need, you must look at the following key areas.
How Much Cash Have You Been Using?
If you’re an established business owner, look at your monthly cash flow report (or go to the next paragraph if you’re a start-up). This report will provide an historical and seasonal perspective. Note the cash received from sales and the cash spent. The net of these two is often referred to as the “net burn rate.” For example, if you have $50,000 in sales and $30,000 in expenses, then your net burn is +$20,000
Your “gross burn rate” only takes cash expenditures into account; in our example, that’s $30,000 and is the more conservative amount, since it does not assume any sales are made. Historical spending patterns are a good starting point in considering future spending plans. Continue reading →
Many startup small business owners take pride in pulling themselves up by their bootstraps and not using financing to get their companies off the ground. But that approach can backfire, a new study in the Journal of Corporate Finance suggests.
The study, conducted by Florida Atlantic University faculty, assessed what happened to companies that took on debt during their first year of operation.
The authors discovered businesses that took on debt are more likely to succeed (as long as they use business debt as opposed to taking on personal debt).
Many small business owners turn to borrowed capital to fuel growth and fund other initiatives, yet access to borrowed capital can sometimes be a challenge. Depending upon where you apply, your business credit profile, and other factors, it might be difficult to get a loan approval. Not all lenders look at the same criteria when evaluating whether or not they’ll approve a small business loan.
But here are three red flags that could put the brakes on any loan application:
1. You have a bad personal credit score
With the exception of maybe the biggest and most tenured small businesses, the need for a business owner to maintain a good personal credit score will never go away. With a personal credit score below 680, for example, it’s unlikely you’ll find success at the bank. And the SBA threshold is around 650 for most applications.
Some non-bank lenders will approve a loan with a lower credit score but will want to see other metrics in place. If your personal score is struggling, making improvements will help increase the odds of success when you need a small business loan.
The first step is to find out where you are. Annualcreditreport.com is one place you can access a free copy of your credit report once per year. You can also check out the three main personal credit bureaus, Experian, Equifax and Transunion, who all offer low cost credit monitoring. Continue reading →
Carolyn Walters’ small business clients know they can ask her more than just tax questions. While “tax is the heart and soul of what I do,” she says as the owner of Financial Solutions Accounting and Tax in Greensboro, NC, she has expanded her business to offer a variety of different services.
“The challenges that small businesses have usually end up in my lap one way or another,” she says with a chuckle.
Walters wants to be the first resource her small business clients turn to when they have questions about small business financing and credit. “Quite a few of my clients are looking at ways to expand and grow their businesses, and that takes money,” she says.
Some of them have the funds they need to grow, but others will need to borrow. And even those who don’t have to borrow may find it advantageous to do so. “If you can get credit at low rates and still maintain the integrity of the business goals you are trying to accomplish, it may make sense,” Walters says. Continue reading →