Financing The Gap

How To Become The Master Of Your Business’s Cash Cycle

Money comes in. Money goes out. And, if you’re a business owner, maintaining the balance of your company’s cash cycle can be a monumental task. So much depends on your ability to figure out exactly when you’ll receive payment from your customers, and when you’ll have to pay your suppliers and employees. A large disparity in your cash cycle (often called a liquidity trap) can spell doom if you’re not prepared.

Business Cash Cycle Master | Ohio CPA Firm
Will you have enough cash on hand to fuel your business if and when you need it? A well-structured line of credit provides you with room for growth and can be established by implementing a borrowing base or working capital covenant. Read on to learn more.

Something Doesn’t Add Up

Typically, you’ll need to fund your business’s resources (materials, labor) every 15 or 30 days. But how are you supposed to pay for these resources if you’re only getting paid for your output (whether in-process or finished goods) every 60 or 90 days? Somehow, you’re going to need to find the cash (or working capital) to bridge the gap. This is particularly true if your business is undergoing a period of growth.
Establishing and maintaining a strong relationship with your bank or financing partner is critical when it comes to managing the time between waiting to get paid and making a payment. When you forge a relationship with your bank, you’ll find that the additional resources you depend on are readily available. Consider the following options.

Line of Credit Amount & Accessibility

Will you have enough cash on hand to fuel your business if and when you need it? A well-structured line of credit provides you with room for growth and can be established by implementing a borrowing base or working capital covenant. The key to being successful in this approach lies in the details. Does the bank truly understand the quality of your receivables and inventory? And does your line of credit allow you to borrow up to 80 percent of your accounts receivable plus 50 percent of your inventory or allow for more borrowing as long as working capital (current assets less current liabilities) is greater than 110 percent?

A construction company, for example, can have bonded jobs (and thus bonded receivables) that the bank may not give it credit for if the bank doesn’t understand the construction industry. Likewise, a bank may not give credit for receivables older than 90 days past an invoice date, even though your company’s history shows that these receivables are highly collectible and subject to standard payment terms from a larger customer. Hiring a professional who can address the needs of the bank, while serving as an advocate for your company’s best interests, can be a game changer when pursuing this type of financing.

Term Financing for New Equipment or Facility Expansion

Are you able to generate detailed financial projections to illustrate how your business will be able to pay back its financing need? And, if you do secure financing, what advance rate is the bank willing to provide? Under the right circumstances, 85 percent of the planned facility expansion cost and 90 percent of new equipment cost can be borrowed. However, in order to receive this type of financing, the bank will be required to generate financial projections for your business for their internal credit file.

It has become a best practice for businesses to drive the completion of their own financial projections and provide them to the bank. Part of the process will require you to research what type of financial covenants (such as debt service coverage, leverage or net worth) will be involved when securing this type of business financing. It is absolutely vital to pay close attention to the covenant definitions to ensure that you don’t get tripped up.

We’ve seen more and more banks pushing companies to enter in to swap loans for long-term financing needs. This interest rate-hedging product is traditionally beneficial to the bank, which means it’s generally not the right financing fit for every business. Consider working with somebody who can help you navigate past these questionable options and toward a promising financial scenario.

Term Financing For New Equipment | Ohio CPA Firm

Secure Your Ideal Financing Structure

The world of bank financing can be quite complicated. Having spent 20 years as a commercial banker, I know firsthand how challenging it can be to ensure that your business has the proper financing structure in place to meet your business’s needs. Whether it’s a quick and honest assessment or a full bank relationship review, I can help you achieve the most beneficial and effective financing structure to help your business succeed and grow. Give me a call at 614.314.5937 to learn more.

By Doug Houser (Zanesville office)

Are you looking for continued business growth? These articles can help:

Looking For The Next Level Of Business Success?

5 Not-So-Secret Secrets Of Successful Businesses

Regular Reconciliation Aides In Fraud Protection