As a business owner, you'll have a first-hand experience of how busy seasons occur. You may encounter challenges budgeting for the season and bridging other seasons (whether slow or busy). Most busy seasons for doing business usually occur during the summer tourist season or the holiday season. During these occasions, your chances of succeeding lies in the techniques you use to keep your operations afloat.
You must understand the specific capital challenges associated with a seasonal business. Strive to maximize your potential to earn revenue as you focus on how to make your business succeed. No business owner wants to have low cash flow when there's an increased demand for services or products during various times of the year. You may need to plan for the available finances wisely and turn to other financing options for more capital.
Not all businesses require borrowed capital to fund their operations during a busy season. Once you establish your need for seeking the business financing, you may consider reaching out to various lenders. For example, if you run a retail store, you may seek business financing to increase your inventory or pay additional staff amidst a busy season. Business financing is the answer to your problems when you're running out of cash, but there's an increased demand for your services or products.
Seasonal businesses may experience difficulties managing cash flow since they have variable operational needs and sales spikes amidst busy seasons. Short-term financing is extremely beneficial to your seasonal business when you want to bridge the gap during the slow seasons and increase your inventory. If you're unable to self-fund the venture and you want outside help, the following business financing options may suit your business:
- Business Lines of Credit
With a business line of credit, you can draw finances against your predetermined line of credit when you need them. Unlike a term loan, this type of financing doesn't offer a lump sum amount of the loan. You'll use it as a credit card to draw finances you need and only repay the used amount.
Your credit score should be above 600, while your time in business should be over 12 months for you to qualify for a business line of credit. You also need an average annual revenue of $100,000 to be eligible for credit lines ranging from $10,000 to $100,000. Since the interest rates range from 13 to 50 percent, business lines of credit are ideal for seasonal businesses looking to cover their hiring and inventory costs.
- Short-Term Business Financing
A short-term business financing is ideal for your business if you're looking for fast funds that cater to your temporary cash flow needs. The terms for this type of financing may range from 3 months to 3 years with the loan amount ranging from $2,000 to $500,000. Lenders issue this short-term business loans at 9 percent to 50 percent interest rates. Others charge prepayment penalties for late or missed loan repayment.
Most lenders will require you to have a credit score exceeding 600 to qualify for a short-term business loan. Your business must be 6 to 12 months old for you to get the loan. You may also qualify for this form of business financing if your venture usually stocks up on inventory before the fourth quarter. Knowing the amount of financing you need and having cash reserves (which can help make periodic loan payments) may be an added advantage if you're looking for a short-term business loan.
- Small Business Credit Cards
Just like a business line of credit, this type of financing gives you a credit line to draw when the need arises. The lender will allow you to repay the borrowed amount with its applicable interest rates (12 to 25 percent). Small business credit cards are suitable for business owners looking to purchase inventories on credit while they prepare for an upcoming busy season. Though your credit score will determine the amount you can borrow, borrowing limits range from $5,000 to over $50,000.
- Merchant Cash Advance
Merchant cash advance providers offer a lump sum cash advance to business owners in exchange for either a percentage of their daily credit card sales, or a small, fixed ACH amount which can be debited from your bank account on a weekly or daily recurring basis. Unlike a business loans, an MCA has flexible repayment terms.
This option is viable for business owners with low credit score, who may otherwise not be eligible to obtain a traditional business loan. Most lenders will accept merchants with a less than ideal credit score and will not report to the credit bureaus if you miss a payment.
An MCA is also ideal for business owners who seek quick financing to cover for an unexpected expense, payroll, and/or retailers who may need to last minute funds to purchase inventory.
How to Approach Business Financing During Your Busy Season
When there's plenty of money coming in, you may be tempted to spend the revenue. However, you can fight this urge by sticking to a well-curated budget and focusing on the bigger picture. The big picture here refers to the plan of attack you mapped out when the busy season began. Read more to learn about how to maximize the value of the borrowed capital while keeping your business profitable.
Since busy business seasons don't last forever, you need to plan in advance for them. Your approaches to borrowing capital should be strategic and timed. You may consider sparing some cash when there's good cash flow to cover the times you experience bad cash flow.
As you plan ahead, you may look into the need for financing your venture during the busy season. Once you recognize this need, work towards improving your business credit profile. You'll definitely have more options for borrowing a little extra capital with an improved credit profile and a strategic plan for borrowing.
With a robust plan for your business, it's possible to have a defined growth strategy and a solid financial model. The plan will assure your potential lenders that you expect to experience challenges, and you have appropriate measures in place to counter them. Robust planning also helps you have a management team in place to help you get through any obstacles on your path to success.
Conquering new markets and developing an additional product line can help you expand your venture. These approaches help you plan ahead while exploring the potential benefits and obstacles your business may encounter. They allow you to be among the leaders in your line of work and give you a chance to develop an agile and responsive enterprise. Your plan should always state exactly what you need business financing for and the amount of money needed.
Sort Out Your Financial Statements and Accounting Records
Your financial statements and accounting records are crucial when seeking business financing amidst a busy season. Ensure that these documents are accurate, detailed, and complete. Remember to also keep your cash flow statements, balance sheets, and income/loss statements in order.
A potential financier will want to examine your financial statements and accounting records before offering you any help. The examination process will offer insights into your account payables, account receivables, debt-to-equity ratio, cash flow, and gross margin. Be ready to answer questions regarding these variables. You should also ask your in-house accounting team to thoroughly scan your financial statements for issues that may catch a lender's attention.
Decide on the Type of Financing Your Business Needs
You should carefully look into the type of financing that can work best for your business amidst a busy season. The options available for business owners at this time may include merchant cash advances and small business administration loans. Choosing an irrelevant financing option may prevent your venture from meeting its desired goals.
If you're considering merchant financing, you must have to be aware of its pros and cons. Merchant financing comes handy to small business owners since it doesn't involve lengthy approval procedures or strict requirements. Take time reviewing each business financing option to determine whether it can cater to your business needs when operating in a busy season.
Financing conditions and approval processes usually depend on the business financing program you're choosing. For a small business loan, the standards are high, and the processing timelines range from 90 days to one year. The documentation needed to process the loan may vary. However, if you choose a merchant cash advance (merchant financing), the approval processes will be fast and convenient
Work on Having a Solid Cash Flow
Lenders will expect you to demonstrate that your business venture generates steady cash flow. They may give you this requirement if you're running an existing business. A solid cash flow may mean that you have adequate funds needed to repay a financing. Your existing debt and past tax returns help determine your ability to make periodic loan payments.
You can demonstrate your solid cash flow through your credit card payments. When you use this approach, it's easier for a lender to determine whether your venture generates enough money. It's also possible to determine whether you're in a position to handle crucial business tasks and pay your employees. Always be ready to illustrate to a potential lender your foreseeable cash flow (the amount of money you have coming in).
Lenders will want a brief history of the liquidity and performance of your business. Among the documents needed to put this history into perspective are tax returns, bank statements, and financial statements. Your loan originator may ask you questions about the fluctuations or drops in your cash flow (if there's any). Be willing to explain why your cash flow dropped in a bridge or slow season.
Choose a Suitable Lender
Since every business financing option has its advantages and disadvantages, you should choose a lender wisely. A large bank may be an ideal lender if your business can adhere to the strict and lengthy approval processes. You may opt for an alternative lender if you're in need of fast cash but don't want to follow the lengthy approval steps. Finding a suitable lender is the first step in seeking financing for your venture during a busy season.
Take time shopping around and exploring alternative lending options. You'll be in for a disaster if you assume that a potential lender automatically has good borrowing terms and conditions. Compare and contrast the fees and rates across all the lenders you approach. Keep in mind that every meeting you have with a lender offers you insights on what to include in your financing application.
Review Your Personal Credit Score Before Borrowing
Lenders will want to look at your personal credit score before processing a loan for your seasonal small business. They tend to use this approach to evaluate the creditworthiness of your business. You may have fewer options for borrowing money if your credit score turns out to be lower than expected. With effort, it's possible to make improvements to a poor credit score.
The FICO Score (a formula for appraising creditworthiness) relies on data gathered by consumer credit bureaus such as Experian, Equifax, and Transunion. These bureaus use a scale ranging from 300 to 850 to rank people's credit scores. Lenders will use the FICO score to determine your creditworthiness. A low credit score makes you a high-risk borrower while a high credit score makes you a low-risk borrower.
Ways of improving a less-than-perfect credit score include paying personal debts in time. Correcting the areas that might be pulling you down and monitoring your score can also help improve your creditworthiness. Though making improvements on a poor credit score may take a while, it's worth the effort, especially if you're planning to borrow more funds.
Borrow Only When You Have Sufficient Cash Flow to Service a Debt
While business financing during a busy season tends to be tricky, you have to be thoughtful about the process. Ensure you have the revenue required to make periodic payments of your loan. If you don't have the adequate cash flow to service the debt, you'll directly damage your business credit profile.
Every late or missed payment of a loan has significant impacts on a credit profile. Once your creditworthiness diminishes, it'll be difficult to borrow money for the next busy season. Consider tracking the impacts of the business loan as you gradually pay it off.
Borrow the Exact Amount of Money You Need
Business financing comes handy to those looking to fuel their operations to attain a higher level of success. Before seeking capital from lenders, take time to prepare yourself and your enterprise. As you plan for the capital, be aware of the borrowing costs and processing fees. Your goal here is to look for money for financing a well-planned project rather than money for non-business uses.
Lenders charge various fees to process business loans. Borrowing more than what your enterprise needs can do more harm than good to your operations and profitability. Once you recognize the need for seeking a loan, calculate how much of it you need. Consider cutting back on things that don't have a return on investment to your business. With a good budget, it will require a minimal amount of effort to bridge your busy seasons.
While it's a rational move to borrow what you need, ensure you don't borrow too little. With little funds, your enterprise will experience challenges attaining its pre-desired goals. You may also experience financial difficulties when an unexpected expense befalls your business. Developing a cash flow forecast for every independent task can help you avoid these situations.
Ensure you get everything right when calculating the amount of money, you need from a lender. Common mistakes business owners make in the calculations include failing to plan for future growth and omitting expenses. Others include understating taxes and overstating sales. Your financing requests should always align with your financial projections every time you want to approach a lender.
Find a Suitable Business Financing Solution Near Me
Learning how to manage cash, operational needs, and financing during a busy season is crucial to running a profitable business. For most businesses, financing acts as a valuable tool that helps keep operations and revenue afloat. Wide Merchant Group, located in the heart of Los Angeles, is a private firm that caters to small to medium sized businesses nationwide, including Puerto Rico. Make an inquiry on our services (which require minimal paperwork) today by calling us at 800-630-4214.