Lenders consider a lot of factors when reviewing a loan application. They look at things like your credit score, your business plan and what you can offer as collateral. They may also consider things that are out of your control — like the economic environment.
Another piece they may look at is your business’s cash flow. This will help them determine how much cash you have available day to day to meet financial obligations — like bills and operation costs. Let’s take a closer look at what cash flow is and how it can affect your small business loan application.
What Is Cash Flow?
Cash flow is a measure of how much money is coming in and out of your business. When you make a sale, cash flows in, and when you buy equipment or pay employees, cash flows out. It shows the ebb and flow of cash in your business.
It’s easy to confuse this with net revenue or earnings. One major difference is that only transactions that have already affected your bank account show up in your cash flow statement. Bills that are due or revenue owed in the future do not have any effect on your current cash flow.
Breaking Down Your Cash Flow
Money comes from and goes to a lot of different places. You could have cash coming in from sales, other loans and investors. While also spending on supplies, staffing, taxes or growth. Your cash flow statement should be broken down into categories that show where you’re spending and earning. Some of these include:
- Cash From Operating Activities — This includes money you earn from sales and cash you spend on paying salaries, buying supplies and generally running your business.
- Cash From Investing Activities — This category reflects the money you’ve invested in your business. This includes purchasing new equipment, opening a new location or acquiring a competitor.
- Cash From Financing Activities — This includes cash from loans, investors or other financing activities.
Your cash flow statement breaks this down to make it simple to see how your business is doing. While you and your competitor may have similar net incomes, your cash flow may show that you’re in a stronger financial position — earning more from operations, investing in growth and maintaining a healthy debt level.
How Does Cash Flow Affect Your Small Business Loan Application?
When it comes to applying for loans, cash flow can make an impact on your lender’s decision. It shows how healthy your business is and if you’re in a state of growth. A positive cash flow can signal to lenders that you have the capacity to take on debt. A negative cash flow could be a sign that your business is running into a bit of trouble.
Be aware that this isn’t the only factor they take into consideration. You’ll still need to maintain a healthy financial history and business credit score.
How To Improve Your Cash Flow
Sixty percent of small business owners say they have experienced cash flow issues at some point in their company’s history.1 If you’re experiencing cash flow problems, here are few things you can do.
- Cut Expenses — Analyze your spending patterns to see if there are any areas where you could cut back. This could be unsold inventory, extra office space or unused software programs.
- Encourage Early Payments — You can incentivize your customers to pay early by offering discounts, you may lose a small amount in revenue but it can give you a boost of cash when you need it.
- Lease Expensive Equipment — Buying equipment can be expensive. Plus, it’ll eventually need to be replaced with newer more efficient models. Look into leasing options to see if it makes sense for your business.
- Consider Invoice Factoring — Invoice factoring can quickly inject some cash into your flow. You sell your unpaid invoices to a company that will give you a lump sum in return for a percentage of the profits.
- Improve Your Inventory — Do a quick analysis of your inventory to see if there are items that aren’t moving. You may find some easy ways to trim the excess here.
- Create a Cash Flow Forecast — A cash flow forecast can help you predict when you need to cut costs and when you have an opportunity for growth.