Sufficient cash flows to enable a business to function
at optimal levels during a financial cycle is paramount. Whether you have a seasonal business, are
anticipating higher sale volumes during holidays or when you need just a little
bit of assistance getting through those slower months until the crowd comes in,
every business requires additional capital at times.
The most popular ways used by businesses include
overdrafts and short-term business loans.
Every business owner must evaluate within his own operational context
when the best time would be to undertake external financing. Set out below, we will
explain some of the benefits of financing within two different situations:
In the first instance, the need for financial
assistance arises due to prolonged periods of low to no revenue, with a
seasonal spike that accounts for the majority of the business’s revenue for a
set financial year. This instance also
refers to new product lines or services being developed. In these instances, costs like rent, labour
costs, marketing and product acquisition or development still has to be
incurred in order to ensure that the business can realise the revenue available
in the busy season or when the new product is released for sale. Because of the timing difference between the
cash flows, it can be difficult to fund these costs. A short-term loan or an overdraft facility
would help manage cash flows until revenue is realised.
In the second instance, the need for financial
assistance arises during the busy season of a business, when demand exceeds the
number of employees and products available for sale. In this instance, competition also usually
peaks, and marketing must be done in order to ensure an edge over the business
next door. Whether it is to hire
contract staff for the duration of the busy season, engage in additional
marketing campaigns or to boost the inventory level available for sale,
additional financing could help ease your mind during these busy periods and
with the resultant revenue realised, the financing can be repaid as income is
earned.
In both instances, an application for financing needs
to be submitted well in advance, in order to ensure the funds are approved and
available when the need for these funds arises.
Proper budgeting and market research, therefore, play an integral part in
the timing of financing in a business, as it provides clear insights into the
amount of financing that is needed, and when it is needed.
It is important to note, that certain scenarios may
arise when business financing might not be the right thing for you. If you are a new business and you do not have
any collateral in the business or established revenue streams, or if you are an
established business and you are still repaying the business financing from the
three preceding seasons due to lack of revenue, it may be that equity
investment would be an ideal fit for your scenario.
The instances, as explained above, does not include
all scenarios where business financing should be considered. Every business is unique and has unique
financing needs. It is therefore
imperative to understand your business, the effects of financing and your
business’s own financing appetite.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)