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Cash flow is the life-blood that keeps a business alive. In fact, it’s not altogether uncommon for a profitable business to fail because they don’t have adequate cash flow. It can also handicap, or even prevent you from borrowing capital to fund a growth project, purchase needed equipment, or overcome another need for additional funds.

Lenders want to know you have the means to repay a loan before they give it to you. Unlike an investor, who is usually willing to wait for a liquidity event sometime in the future to earn his or her return, a lender wants to make sure you can make the first scheduled periodic payment and every subsequent payment after that. What’s more, they want to make sure you have the cash flow to make those payments whether or not the anticipated ROI from the loan pans out.

In today’s world of weekly or daily debits from a business bank account to make loan payments, many lenders not only want to know that you have good cash flow, they want to make sure you have the right kind of cash flow. What does that mean?

If the majority of your cash flow can be attributed to a few big deposits at the end of every month, your overall finances may be healthy, but it might disqualify your business for a loan that requires an ACH debit on a daily or a weekly basis. In that case, the lender wants to see a daily cash flow that will accommodate the more frequent, albeit smaller, periodic payments. That’s why a lender may want to see several months of bank statements—they want to verify that you maintain an average daily balance that will allow you to make the regular periodic payments.

Creating the Right Kind of Positive Cash Flow

Profits and cash flow are two different things. You can’t look at your profit and loss statement and get a good understanding of your cash flow. A small business can look profitable on a P&L and not have any cash available on a daily basis. For example, if your account normally has a $5,000 to $8,000 balance at the end of the month, a lender might question your ability to make $4,500 in loan payments during the month. That $5,000 balance is cutting it a little close and leaves very little for unexpected expenses that might need attention during the month.

It’s how you manage your accounts receivables, how you manage your inventory, your accounts payable, any loan payments you might already have, and any other regular expenditures, that really impact your cash flow situation. You need cash to generate profits, pay your employees, make loan payments, and cover other costs on time.

The best way to create a positive cash flow is to ask a couple of important questions:

  1. What does my cash flow look like now? What is my cash balance every day?
  2. What do I expect it to be six months from now?

If you can’t answer these two questions, you could be in trouble—at the very least, you have some work to do. Take the time every week, or at least every month, to track your cash flow to determine how much cash you have in your account every day, every week, every month. This will help you determine whether or not you have the available cash flow to service a debt and if you can support a daily, weekly, or monthly periodic payment.

If you can demonstrate to a lender that you have the ability to make regular and timely loan payments, it will not only improve your odds of success when applying for a loan, it will give you the confidence of knowing your business is in a position to appropriately borrow to help your business grow.

About the Author(s)

Ty Kiisel headhot

Ty is the author of "Getting a Business Loan: Financing Your Main Street Business" as well as a contributing editor for OnDeck, an online platform where millions of small businesses can obtain affordable loans with a fraction of the time and effort that it takes through traditional channels.

Contributing Editor, OnDeck
Cash Flow