Article Summary: If you’re like many small business, you turn to financing during your busy season to bridge when the season ends and the next busy season begins. It’s not uncommon for businesses large and small rely on borrowed capital at some point during the year to maintain business operations, fund expansion projects, or bridge seasons.
With that in mind, here are five things you should consider if you’re thinking about financing to fund a slack season:
- Don’t wait until you are out of cash to borrow
- Don’t borrow if you won’t have the cash flow to service the debt
- Borrow what you’ll need and no more
- Plan ahead
- Don’t ignore your personal credit score
These five suggestions will help you maximize the value of borrowed capital and help you keep your business profitable all year round. Keep reading to learn more.
Having spent 20+ years in a very seasonal small business, I came to appreciate what it takes to manage finances during the busy seasons, bridge the slow seasons, and budget for the year. Fortunately, we had two or three particularly busy seasons during the year, so our annual revenues weren’t dependent upon the holiday season or the summer tourist season to keep us afloat.
It’s always very tempting to spend what you have when there is plenty of revenue coming in, but sticking to a budget and thinking of the big picture (you likely mapped out at the beginning of the year) is a better plan of attack.
If you’re business relies on a business line of credit or other financing—like a short-term business loan—to help bridge from one season to the next, there are a few things you should consider when looking for financing; the first being, don’t wait until your busy season is over and you’re cash poor.
- Don’t wait until you are out of cash to borrow: Most lenders want to know that you have the revenue to support a loan when you submit your application. They’ll likely want to look at several month’s worth of your business bank statements to determine if you have the cash flow to support the periodic payments. If you wait to apply until after the revenue stream has significantly dropped, and are in the middle of your bridge season, you will have some explaining to do to account for the lack of cash.
- Don’t borrow today if you won’t have the cash flow to service the debt tomorrow: I believe borrowing to bridge busy seasons can be tricky and takes some extra thought. It’s important to make sure you will still have the revenue needed to make your periodic loan payments. If not, you’ll be damaging your business credit profile with every missed or late payment—making it more difficult to borrow the next time you need an infusion of cash.
- Borrow what you need—and no more: There are costs associated with borrowing, so borrowing more than what you’ll really need to get through your slow season can do more harm than good. And, expect to tighten the belt a little. Yes, you may need to cut back on some of the things you’d normally be doing during the busy season, but if you budget well, you’ll be able to bridge busy seasons with a minimal amount of pain. We used to set aside some cash when business was hopping in anticipation of projects we could do during the lull time to keep everyone busy.
- Plan ahead and don’t be reactionary: I’m a big proponent of looking at the year to strategically borrow and planning in advance for the bridge seasons. This could mean putting aside some cash when cash flow is good to cover times when it’s not. I could also mean recognizing the need for financing and working to improve your business credit profile now, so you’ll have more options available to you when you need to borrow a little extra operating capital.
- Don’t ignore your personal credit score: For most small business owners, your personal credit score will be a factor when a lender is evaluating your business’ creditworthiness. The lower your score, the fewer options you will have when it’s time to borrow. Fortunately, we tend to impact the metrics we pay attention to. So, if you have a less-than-perfect personal credit score you can improve it by monitoring your score, correcting the areas that are pulling you down, and paying your personal obligations in a timely manner. Even if you have a poor score, with effort, you can make improvements. It won’t happen overnight, but it will happen.
Prudently managing cash, financing, and operational needs during your busy season will help you keep your business profitable all year long. For many business, financing is a valuable tool that helps the do it. Just remember, thinking ahead and planning for the ups and downs of your business will help you avoid making reactionary decisions that can sometimes do more harm than good.