Cash flow refers to the net amount of cash and cash equivalents entering and leaving a company. Cash received represents inflows, whereas cash spent represents outflows. Cash flow involves a receivables account, a payables account, and shortfalls.
When businesses face sudden cash shortages or issues with cash flow, many feel forced to take out expensive, short-term financing options like factoring or bridge loans. In normal circumstances, these financing options aren’t the best financial decision. They may have high interest rates, short repayment plans, or restrictive terms that you can’t avoid.
Taking out one of these financing options is understandable when your company needs cash fast. Time isn’t always on your side when your company needs cash, so waiting for a loan with good terms isn't always an option.
In this case, the best way forward is to find a longer-term, more affordable loan to refinance your high-interest, short-term debt. Lenders will heavily consider your credit score, company’s age, and business’ annual revenue when deciding whether or not to extend a refinancing offer.
You may be in the perfect position to refinance your loan if your company has better financials than when you first took on the debt. You should also consider refinancing your loan if it would significantly improve your business’s cash flow. In these cases, refinancing may be the best way forward, even if your current debt has a prepayment penalty.
Multiple sources of debt complicating your company's finances also serve as a common sign that you should consider refinancing. Even though it's referred to as debt consolidation, it's still a method of refinancing company loans.
When a company has a clear turnaround strategy, refinancing provides a useful alternative to debt consolidation. If you find yourself in this position, you should find out what's causing the issues, devise a solution, and communicate openly with your bank about it.
You should have a good understanding of your current situation and a clear turnaround strategy in place before approaching your bankers. Ask yourself these three questions to get started:
What events transpired that resulted in your issues?
What steps have you taken to address these issues?
What else are you supposed to be doing now?
If you don’t lay this foundation, banks are much less likely to collaborate with your company to find refinancing solutions. Ensuring that you have a plan in place to get the best loan package for your business is an essential part of the process.
You should then check your business loan statements to see how much you still owe. Once you have this information, you can figure out how refinancing can save you. In the meantime, gather the necessary documents as quickly as possible. Most business loan applications require recent tax returns, legal entity statements, bank statements, balance sheets, profit and loss statements, and business plans.
Once you have determined how much you can save and have all of your documents in place, you can compare and contrast lenders. Loan aggregators allow you to compare lenders and loan programs quickly and easily.
If you would rather work in person, you can begin by visiting a bank or credit union in your area to learn more about business lending options. In addition, some cities have unique resources for small-business owners that may be able to assist you.
You should examine all provided refinancing options carefully by considering closing costs and other origination fees. These up-front costs can be costly for a small business with limited resources, and they may end up hurting rather than helping.
For some businesses, especially those with financial problems, refinancing may not be the best option. You may want to explore alternative options, such as changing the terms of an existing loan. For example, a company may be permitted to delay principal repayments for several months to provide temporary relief to cash flow.
You may also want to consider consolidating multiple loans into a single loan with a fixed monthly payment.
Whether or not you are refinancing a loan, it is important to track and understand your company’s cash flow. The following tips will help you throughout the process:
Reduce your spending during seasonal changes
Logging is one of the many seasonally-dependent industries. During the slow months, you should reduce your spending to help mitigate extreme changes to your cash flow.
Invest in your logging equipment
The right piece of equipment can make or break a logging company, no matter how big or small. The latest equipment, or at least high-quality used equipment, can help keep your business in the black by reducing downtime and minimizing lost revenue.
Keep an eye on your cash flow regularly
You must keep track of your consumables and keep tabs on your cash flow at all times. Make a point of checking in regularly, whether it's weekly, monthly, or quarterly. These check-ins will let you see any errors or problems early on and fix them before they become a bigger problem.
Offer incentives to expedite payments
Offer early payment incentives to your customers, but don't forget to do the math in advance to make sure the trade-off is worth the loss. Doing so will allow you to gain better control over your receivables. You can offer discounts if customers make their payments early or quickly or limit the number of people who can receive a credit.
When placing large orders or signing long-term contracts, request deposits or partial payment
Deposits and partial payments will help ensure that you have enough money to cover the cost of materials and pay the employees.
Keep a small sum of money aside as a fallback
It's critical to have extra cash on hand in case of emergencies or to fill in any gaps in your cash flow plan. Remember that a line of credit is not a cash reserve on your balance sheet but you can use it in the same way.
Consider enlisting the assistance of someone else
Working with a trusted partner to monitor and improve your cash flow could be more beneficial financially for your company and give you more time to focus on other essential tasks.
You can also consider hiring a collection agency to collect unpaid accounts and increase your cash flow.
Always be on top of your billing
Send invoices as soon as the work is finished or the products are delivered. Make sure your invoices go to the right person by finding their name, job title, and mailing address.
Do not wait until you are in a tight spot to open a credit line
A business line of credit can help your company if it runs into cash flow issues. If you use your accounts receivable or inventory as collateral, you might be able to get a credit line for a percentage of that.
You can also look for credit cards that offer rewards, such as points for travel or business expenses.
It may make sense to refinance a business loan if the interest rate, fees, or repayment terms are better suited to the company's specific needs. Refinancing a loan can have costs associated with it that outweigh the benefits, as with any financial commitment.
Refinancing your logging business loans is a relatively easy process. Make sure that you have a solid plan, organize all of the relevant documents, determine how much you can save by refinancing, and compare all of your financing options. If you have a cash flow problem, look into other business funding sources like debt consolidation or rewriting the loan terms.
Whether or not you decide to refinance your logging company’s loans, you should keep a close eye on your cash flow. You can reduce your spending during the off-season, invest in high-quality equipment, offer incentives to expedite payments, require deposits or partial payments, keep an emergency fund, consider hiring a financial professional, stay on top of your billing, and open lines of credit in advance to do so.
No matter which path you decide to take, Equify Financial is here to help. Our team of seasoned financial professionals will walk you through the refinancing process and explore all of the options available.
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