Income Statement: An Overview

Income Statement

A business owner’s income statement is a key part of their financial story. You might be tempted to leave as much of your accounting work up to your bookkeeper, sure. But your income statement — which you also might know as your Profit & Loss, P&L, or earnings statement — is something you should know how to read (and produce) own your own.

A P&L gives small-to-medium enterprises (SMEs) the crucial understanding of the actual net profit of their business. In other words, it’s the only way you can actually figure out if your company is making money — and whether you might want to adjust your cash flow management processes to get yourself to profitability.

The basics of an income statement

With accounting, it’s tempting to stuff your fingers in your ears and leave everything to your certified professional accountant (CPA). At PayPie, we’re fundamental believers that it’s really important to know what’s going on in your books so you don’t have to smile and nod as if you understood your own business’s financials.

In the simplest sense, an income statement measures your income and expenses over a period of time. (Hence why it’s also called a Profit & Loss — these terms are interchangeable with “income statement” from here on out.) You’ll quite obviously want to keep P&Ls for your fiscal year, but most SMEs also keep these for quarters to spot helpful cash flow patterns (we’ll talk about this more in a bit, hang tight). Sometimes, producing them monthly can even help more.

Whether or not you’re tracking these numbers formally, you’re likely keeping tabs on this info in some sense or another. Otherwise, you’d have no idea what’s exactly going on in your business. But the point of an income statement is to get stuff organized in one place for you to be able to make informed decisions and help anyone else who’s evaluating your financials (like a business lender or the IRS, for instance) get a quick sense of the financial health of your company.

If you’re using small business accounting software, like QuickBooks Online, you can create an income statement within the application. At PayPie, our cash flow forecasting and risk assessment tool uses your income statement as a primary source for analysis and insights.

Profit & Loss

What an income statement shows

When someone’s on a diet, they’re supposed to log calories in and calories out. It makes sense why a dietitian would recommend a food and exercise journal — if you’re trying to get a sense of whether or not you’re on the right path to losing weight, you have to understand whether you’re eating more or burning more. Your net calories will tell you.

In a way, your statement of income is like your business’s diet plan. You have to figure out if you’re spending or earning more, and your net profit will reveal that. Spend more than you earn and you’re in the red; flip that, and you’re in the black.

The numbers on your P&L will allow you to get a sense of the answers to these questions:

  1. Is my business generating a profit?
  2. Am I spending more than I’m earning?
  3. When am I spending the most, and when are my costs lowest?
  4. Am I paying too much to produce my product?
  5. Do I have money to invest back into my business?

And, the more granular your records, the better able you’ll be to identify trends.

Your income statement, cash flow statement and balance sheet are three of your main financial reports. Read how they all come together. 

What you’ll need to read an income statement

There are a few essential elements of a Profit & Loss. You’ll need to understand the fundamental differences among them all to not only put one together but to also read one, too.

The first two are the most important of all:

  • Revenue: What your business takes in. This combines any revenue stream, whether it’s from a retail storefront, e-commerce, wholesale business, passive investments — you name it. Put that here.
  • Expenses: What your business spends. This includes both the fixed and variable costs for making your company run on a daily basis. Think salary, overhead, redesigning your company website, software.

Then, you’ll also want to know:

  • COGS: Cost of goods sold. This means taking into account the component parts of what it takes to make whatever it is you sell. So, even if the candles in your shop sell for $18, you need to think about the expenses to get the goods ready for sale, like the jars, wicks, wax, and labels. This is most important for product businesses, less so for service businesses who may not have a COGS.
  • Profit: Your total expenses minus your total revenue. Although this seems straightforward, this doesn’t tell the whole story.
  • Gross Profit: Your total profit minus COGS. You end up paying your business’s operating expenses from your gross profit, so this number is arguably the most important of all to understand from your income statement.

You might also hear the abbreviation EBIDTA, which means earnings before interest, depreciation, taxes, and amortization.” Don’t worry about that too much unless you’re dealing with investors or you’re a very high-grossing business (in which case, your accountant will help you out). But, basically, this number provides a very clear picture of how your business is doing without these other factors. A look at the cold, hard financials of your business beyond cash flow, since it looks at non-cash items, too.

Your income statement will include some other terms, too, but these are the ones you’ll need to grasp in order to use a P&L effectively to make decisions for your business.

Who looks at your income statement

Some or all of the following parties will or should review your P&L statement:

  • The Internal Revenue Service (IRS). You might need to prepare your Profit & Loss for any number of reasons. In the most basic sense, the IRS will generally need to take a peek at your income statement — along with your balance sheet and cash flow statement — in order to verify your business’s financials. If for no other reason, that should give you a big incentive to keep this important document clean and up to date. Also, your business income taxes are based on your profit each year.
  • Small business lenders. In many scenarios, lenders require you to submit your income statement with your application for business financing. That especially goes with term loans where lenders will be taking a hard look at whether or not you can handle your repayment.
  • Investors. Unsurprisingly, if you’re courting investors — or vice versa — submitting a Profit & Loss in due diligence will be a must. In order for lenders to get a true understanding of your financial picture, they’ll take a hard look at your books. This is where EBITDA on your statement of income will be important, as well as your cash flow forecasts. Detailed records are essential here.
  • Buyers or clients. If you’re planning on selling your business — or even doing business with new clients — you should prepare to have your P&L ready to show. The income statement gives partners a sense that you’re solvent.
  • You. (No exceptions on this one.)As a savvy business owner, the more time you spend in the weeds understanding where you’re spending and where you’re earning, the more intelligently you can make decisions. The more helpful you find your P&Ls, the more you might find you want to keep more frequent records.

Your income statement should inform financial decisions

Your Profit & Loss is meant to give you a great sense of the current sense of your business financials. Beyond seeing the now, though, smart business owners will make decisions based on the numbers.

Read More: How to Read a Cash Flow Statement & The Difference Between Profit and Cash Flow 

The relationship between cash flow and your P&L

First, your income statement will part the clouds about your net profit. Should you be looking into different manufacturers or suppliers to lower your cost of goods and spending less? Should you be shifting a portion of your production to a different season to even out your cash flow?

Toward that end, you’ll also be able to spot important seasonal fluctuations in your finances. Even if you’re not making tweaks to your cash flow management processes based on this info, it’s essential that you know the trends.

Tools, like cash flow forecasting (see image below), also help you better understand how your business both earns and spends throughout the course of a month, quarter, and year. These kinds of insights and analysis are powerful. You’ll really know when your business will be flush with liquidity, and when you need to save up.

full risk profile

Signing up is easy, and PayPie integrates directly with QuickBooks Online.

(More integrations are on their way.)

The information in this article is not financial advice and does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional. 

Images via Pexels and Shutterstock. 

How Business Credit Cards Affect Personal Credit

Business credit cards and personal credit

Keeping personal and business finances separate is a cardinal rule of owning a business. But there are instances where it’s impossible to keep the two apart (by no fault of your own). One example? Business credit cards. If you’re applying for a business credit card, chances are you’ll have to share your personal credit history to even apply.

There’s a strong link between your personal credit and your business credit — especially if you’ve just started your business. Because you don’t have an established credit history, you may have to sign a personal guarantee that makes you personally responsible for your business debts.

Business credit cards are a great resource to keep a business humming — but they’re not without risks and should be used wisely. This is why PayPie advocates monitoring cash flow to get a 360° view of your company’s incomes and expenses.

Business credit cards and personal credit

When card issuers approve credit card applications, their primary decision factor is risk. Before extending credit, they want to know if, historically, a borrower has paid back their obligations on time.

The tricky issue for new businesses is their lack of credit history. It’s hard to determine how good you are at paying off debt if your company doesn’t have a borrowing history in the first place. This forces creditors to look elsewhere to get a sense of their applicants’ creditworthiness. The first place they look? Your personal credit.

If an applicant has a personal history of paying on time, it’s likely that they’ll pay their business credit card bills on time too. In this respect, business credit cards function as an extension of your own personal credit. Until your business takes on debts of its own and builds its business credit history, your personal track record serves as a substitute.

business owner using a credit card

Business credit cards and personal liability

The connection between your personal credit and your business credit card doesn’t end at the application process. You can expect to sign a personal guarantee when you open your card as well. The personal guarantee is a promise to your creditor that you will pay for debts if your business can’t.

The idea of taking on your business’ debt can sound intimidating. After all, most entrepreneurs set up business entities like limited liability corporations (LLCs) or S-corps to separate their business liability from their personal obligations. But, business entities only offer so much protection and little of it extends to paying off your company’s credit card balance.

The CARD Act of 2009 protects personal credit card holders from several practices, such as arbitrary interest rate increases, double-cycle billing, and unfair payment allocations. But, the act doesn’t cover business credit cards. Many major business credit card providers offer their customers the same or similar protection. When you apply for a card, just make sure you know if your provider offers any protection from unfriendly practices.

How Business Financing Options Affect Credit (And Vice Versa)

Circumventing a personal guarantee (Why it’s hard)

Not every credit card requires a personal liability guarantee. There’s a chance you won’t have to sign one if your personal credit is stellar, you have a preexisting relationship with your creditor, or your business already has a solid credit history. Alternatively, you and your business partners can apply for a limited liability business credit card, but unless you’re making millions in revenue, you probably won’t get approval.

Regardless, unless you specifically go out of your way to avoid a personal guarantee on your business credit card — and have an outstanding credit history with significant revenue — you’re likely going to need to sign one.

The Best Business Credit Cards and How to Pick the Right One 

How business debt affects personal debt

Not only are you personally responsible for business credit card debts if your company can’t take care of them — your personal credit history will also be on the line if creditors don’t get paid.

Of course, bankruptcy is a last resort. If your company completes the Chapter 11 process, you can still potentially continue to run your business and settle your debts entirely through the financial veil of your company. But, if your company doesn’t qualify, can’t meet obligations, or otherwise folds before or after bankruptcy — you’re personally liable for your company’s unpaid credit card bills.

Should your business’ debt issue get to a point where you can’t pay back business purchases yourself, you may even need to file Chapter 7 bankruptcy as an individual, too.

Protecting your business and personal credit

The idea of business credit card providers having access to your personal finances is a frightening one. But, there are ways to mitigate the prospect of this happening.

Establish a strong credit history for your business if you want to create distance between your personal and business credit. The longer your track record of paying on time, the more trustworthy you’ll appear to creditors. The more trustworthy your company is, the better your interest rate will be. Creditors will also be more likely to work with you when payment issues arise, giving you more flexibility to pay back debts.

Aside from generating revenue, the other way to create space between your business and personal credit is time. The longer you’re in business, the more likely banks are to view your company’s financials as separate from your own personal history. There may not be much you can do to influence the passing of time. However, patience perseveres here.

A business credit card is only one component of your company’s suite of credit and payment tools. Keeping track of them all, while doing all you can to improve your business’ credit, can be challenging.

Our cash flow forecasting tool helps you get the big picture of how all your incomes and expenses come together — including how it influences your risk profile.

QuickBooks Online users can get started today. All you have to do is sign up.

main dashboard and ratios

PayPie currently integrates with QuickBooks Online. Additional integrations are coming soon.

The information in this article is not financial advice and does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional. 

Images via Pexels. 

How Cash Flow Consulting Helps Businesses

cash flow consulting stock image

The dictionary definition of information is: “The communication or reception of knowledge or intelligence.” The information we take in every day helps us make sense of the world. The same is true of your business financial information. The challenging is gathering the right data and applying it in the most constructive ways.

While a growing number of small to medium-sized enterprises (SMEs) use accounting software to track financial information, the real value is taking this information and making it more meaningful. One of the most vital tools for making financial data more intuitive is cash flow forecasting via tools like the ones provided by PayPie.

In conjunction with the right tools to manage cash flow, businesses also need cash flow consulting from accountants aiming to add greater value to the services they provide. Every business owner understands they have to comply with many levels of business legislation, like taxes. But, they also want to know how to make better short- and long-term business decisions.

Why cash flow consulting is crucial

Study after study has shown that cash flow issues are one of the main reasons businesses fail. According to JPMorgan Chase, most small businesses only have enough of a buffer to cover 27 days of expenses.

In order for a business to succeed, it has to understand exactly how money is moving in and out of the business. It has to know when customer payments are received and when vendor payments are due. As simple as this may sound, it’s actually easier said than done.

While accounting software is genuinely useful for capturing data, the real opportunity comes the tools for interpreting this data and making it more meaningful for the end user — the business owner.

Cash flow management starts by creating forecasts. It’s further improved through cash flow consulting provided by a professional accountant with the expertise to explain concepts, like the difference between cash flow and profit, and help set and evaluate goals.

Case Study: Cash Flow Consulting in the Real World

Information overload vs information empowerment

The struggle is real. According to IBM, 2.5 quintillion bytes of data are produced every day. A single copy of the New York Times contains more information than the average 17th-century Englishman would have encountered in his entire lifetime.

However, a 2016 study by the Pew Research Center, indicates that people have learned to live with increasing amounts of data and are accepting it as the norm. In fact, 67% (nearly two thirds) of respondents said that having more information at their disposal actually simplifies their lives.

SMEs who review their cash flow only once a year have a meager 36% survival rate after five years. Those who monitor cash flow on a monthly basis have a staggering 80% survival rate.

Truth: When we need to know something, most of us “Google” it. But, how do you make analyzing cash flow as easy as an online search?

Cash flow forecasting — there’s an app for that

One of the largest areas of growth for accounting software, especially cloud-based, online versions, is third-party applications (apps). These apps work with the accounting software to add greater functionality in terms of gathering and analyzing data.

PayPie’s cash flow forecasting tool helps SMEs and the accountants who serve them turn financial data into a highly visual, intuitive and near-real-time report.

Currently integrating with QuickBooks Online (with future integrations to come), PayPie’s cash flow forecast uses data visualization to take raw financial information and translate it into an interactive dashboard that breaks down a business’ cash flow and risk profile.

cash flow management main dashboard

Why spreadsheets don’t work

Humans are visual learners90% of the information transmitted to our brains is visual. In terms of visual impact, most spreadsheets just don’t cut it.

According to big data expert Bernard Marr, the problems with spreadsheets are that:

  • People don’t like them.
  • Key data is often hidden.
  • They’re challenging to interpret.
  • They don’t lend themselves to showing historical trends.
  • They’re hard to share.

Why data visualization makes all the difference

Data visualization literally lets you picture and interact with your data. For example, PayPie’s cash flow dashboard helps businesses drill down through their cash flow data in order to:

  • Clearly identify patterns and relationships in terms of:
    • Accounts receivable vs accounts payable
    • Sales vs profit
    • Income vs expenses
  • Get a clearer perspective on:
    • Cash flow
    • Risk profile
    • Overall financial health

Get the Details: Cash Flow Forecasting — What You Need to Know

Seeing is believing

Which information is more powerful? The spreadsheet or the visuals? This is the value of cash flow forecasting using data visualization.

Balance Sheet

Profit & Loss

How cash flow consulting helps accountants deliver greater value

“Every financial cycle is an opportunity to sit down and set goals and project numbers forward with your significant clients. Looking forward is not only important, but often essential to identify and avoid any looming business issues or, more positively, for identifying new opportunities too.”

—Richard Francis, AccountingWEB

As more and more data entry and compliance tasks are automated, accountants will have more time to apply financial data. Accountants are already viewed by entrepreneurs as their most trusted advisors. Cash flow consulting builds upon the advisory role by providing talking points for regular check-ups and the groundwork for better decision-making.

  • Cash flow consulting benefits both the entrepreneur and the accountant by:
    • Educating and empowering the business owner.
    • Underscoring the accountant’s expertise and advocacy.

Read More: 10 Reasons Accountants Should Offer Cash Flow Consulting

Which businesses need cash flow consulting the most?

Every kind of business, but more specifically small to medium-sized businesses (SMBs) who live and die by the cash flow they earn from the sale of goods and services. This means startups, freelancers, microbusinesses, manufacturers, retailers and any type of “-ers” you can think of.

How cash flow affects risk and credit

Cash flow is a measure of a business’ ability to meet its short- and near-term financial obligations. How well you manage your cash flow indicates how well you manage your business overall.

Prospective lenders and business partners who do their due diligence will want to know if you’re in good standing, before establishing the terms of any agreement.

A cash flow forecast from PayPie includes a risk score, ranging from 0 to 100, that reflects the key indicators used to monitor cash flow. It’s a number you can use to evaluate the financial health of your business and how others view you as well.

risk score

What businesses need from a cash flow forecasting tool

By comparing reviews of other cash flow applications, PayPie has found that SMEs and accountants are looking for a cash flow forecasting tool that’s:

  • A timesaver — Our algorithms do the work so you don’t have to.
  • Easy to use — Just connect your QuickBooks Online account to your PayPie account.
  • Cost-effective — Our cash flow forecasting tool is free.
  • Risk-free — We use the highest standards, including 256-bit encryption, to protect your data.
  • Beneficial to the bottom line — Our dashboard gives you the insights you need to optimize cash flow and make better decisions.

Ready to give PayPie’s cash flow forecasting a try? Sign up and get started today.

PayPie currently integrates with QuickBooks Online. Additional integrations are coming soon.

The information in this article is not financial advice and does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional. 

Image via Shutterstock.

How Business Financing Options Affect Credit (And Vice Versa)

business financing options

Applying for business financing can sometimes seem like an opaque process. Yes, there’s some subjectivity involved in business financing approval — a human underwrites your loan, after all. But, for the most part, lenders use a fairly consistent set of qualifications across the board. No matter which small business financing options you’re seeking, lenders often look at one element before anything else: Your business and personal credit histories.

This means you’ll need to understand your credit history and how it affects your creditworthiness before applying. Once you’re approved, you’ll also need to know how getting that loan will affect your credit afterward.

Proactively, you can take charge of your business’ cash flow by using forecasting tools. PayPie’s forecasting tool can help you see the strengths, weaknesses, and opportunities in your cash flow. As business funding plays a role in your cash flow management, here’s what you should know about the relationship between business financing options and your credit.

Business funding begins with your credit history

Some types of business financing products are harder to qualify for than others — that’s a given. For instance, only the most qualified candidates with solid credit histories and consistently great revenue can score Small Business Administration (SBA) loans. (Despite your buzz, your kombucha startup will need to build up some real time in business before you can even consider a government-backed loan.)

Before you can even understand if you’re in the running for certain business financing products, you’ll want to review the basic requirements for business financing options you’re interested in. These requirements will vary from lender to lender. They’ll sometimes include revenue and time in business — but they’ll almost always include your credit rating.

Before you apply for business financing, lenders look at your credit history because it’s considered an objective representation of your history with debt. A credit report indicates risk: the better your report, the more likely they are to get their money back. And lenders are in the business of mitigating their risk. They tend not to lend to the riskiest borrowers with weaker credit histories.

Your Business Credit Report and Why It Matters 

Both your personal and business credit histories matter

As a business owner, your personal credit history will be the first place a lender looks to size up whether or not they believe you’re a good candidate for any sort of business financing options. But they’ll also be looking at your business’s credit history.

A personal credit score is that number you’re used to seeing usually measured out of 850 (though some other bureaus use different standards) — it’s important for applying for personal credit cards, mortgages, car loans, even when you open up an account with a new telecom provider. Factors that affect your personal credit include your credit utilization ratio, length of credit history, outstanding debt, and more. Your personal credit score will vary slightly among the three main bureaus — Equifax, Experian, and TransUnion — depending on how they weight different factors. Lenders will look at this because you own the business — so, if you’ve been historically responsible with personal debt, it’s likely you’ll do the same with your business’s money.

Then, there’s your business credit score. It’s exactly the same in that it represents how you’ve handled debt in the past for your business. The factors that go into it are similar, too, but it also includes things like the risk inherent in your industry (like tobacco manufacturing or apparel manufacturing) and your company size. This score, which is often between 0 to 100, begins building as soon as your business starts.

Why a strong credit rating is important

A strong credit history obviously hugely important for qualifying for business financing options. But, often, the stronger your credit rating, the less expensive your loan. Candidates with good credit history — and, subsequently, higher credit scores — will generally receive better repayment terms.

For example, if you apply for a $35,000 medium-term loan with a credit score of 810. You might receive a four-year monthly repayment at 8.5%. That’s $6,409.15 in interest. But maybe that same loan to a candidate with a score of 690 would have monthly repayment terms of three years at 15%. Try paying $8,678.31 instead. There are, of course, a lot of other factors that go into determining your loan terms. But credit history is a big piece.

business financing options credit report

How business financing options affect your credit rating

You got the business financing you needed — that’s huge. Take a breath, feel good. Okay, now get serious about paying it back so you don’t put your credit history in jeopardy.

We’re not out to be killjoys, certainly. You wouldn’t be flippant about letting your business credit card bills collect dust, right? You’ll need to be serious about paying back your business loan with the same steadfast approach, too. Although a business loan is a very different financing instrument than a business credit card, they’re both funding options. No matter what you’re approved for, you have to pay back your debt. That means delinquency on your business loan will negatively impact your credit history.

The Best Business Credit Cards in the United States 

How business financing options can improve your credit

Before we get into doom and gloom, let’s look on the bright side. If you’re diligent about paying your loan bills on time and in full, according to the terms your lender sets, you’ll be able to raise your score. It makes sense: You’re proving to your lender that you are, in fact, responsible with debt.

If you pay off your loan like you should, you’ll put yourself in a great position to qualify for better financing products down the line — whether that’s a better business credit card or a higher-quality loan (like that SBA loan). You could even refinance your existing loan to lower the cost of your payments now that you’ve proven you can pay back your loan bills.

How business financing options can hurt your credit

On the other side of the coin, your credit rating could be at risk if you miss those payment due dates, or you’re not able to pay at all. This is what’s being called “delinquent” or “in default” respectively. Both are very, very bad news for your creditworthiness.

How to use cash flow to choose the right business financing option

It’s absolutely crucial that you only take out a business loan that you can afford. That means one that you can pay back in terms of its total capital amount, but also one with repayments you can afford based on your business’s cash flow.

When you use your cash flow forecasting tool to understand what kind of money is going on and what’s going out, you should be able to make an informed decision as to what you’ll be able to handle on a daily, weekly, or monthly basis — whatever your terms are. That’s why it’s so important to know your cash flow.

As you can imagine, that’s also why lenders scrutinize your bank balances, balance sheets, and cash flow statements so closely. They want to make back their money.

Cash flow vs Profit — The Difference 

How three types of business financing options could affect your credit

1. Short-term loans

Term loans are what you’re thinking about when you hear “business financing” — that lump sum that gets deposited in your business bank account after approval. They come in lots of different forms. Short-term loans good solutions for working capital, specifically with bigger purchases.

The most important thing to understand about term loans is that you begin paying interest on the full amount of your term loan as soon as you receive it. Short-term loans specifically often require daily or weekly payments — which might be difficult for some entrepreneurs to keep up with.

Term loans will absolutely build your credit with consistent payment. But, daily or monthly payments can quickly become overwhelming for business with a high risk of cash flow problems. You’ll need to be sure you can afford these payments before signing on to a short-term loan.

2. Business line of credit

As an alternative to a term loan, a business line of credit is a better option for businesses with cash flow concerns. It’s set up as a kind of hybrid between a credit card cash advance and a traditional business term loan. You’ll get approved — based on your personal credit history, generally — for a certain amount of business financing. Then, you’re able to take out — or “draw” — as much or as little as you want to use at a time.

What’s different here is that interest only begins to accrue when you draw funds, and you’ll only owe interest on the portion of your total credit line that you use. Think of it like a clock starting. If you were approved for a business line of credit in January with a six-month repayment term, but you didn’t make your first draw until March, your repayment isn’t due until September.

Maybe you need a short-term business financing option, but you’re concerned about a business term loan tanking your credit history because you might not be able to afford daily or weekly payments. That’s a real concern — especially since many people use short-term financing to supplement cash flow concerns. In that case, a business line of credit could be a much better fit. Not only will you not have to worry about destroying your credit rating in the same way, but a business line of credit is actually a great credit-builder to prove your responsibility with repayment.

What to Know About Cash Flow Forecasting 

3. Invoice factoring

Invoice factoring is another essential option for cash flow crunches. With this type of business financing, you actually sell your invoices to a lender (factor) who’ll pay you a portion of your invoice, and then work directly with the vendors whose payment is outstanding to seek the remainder. You’ll get the rest, minus a fee when the balance is paid out.

This is one of the best options available for cash tied up in trade credit or overdue invoices. Because you’re selling your invoice and not taking on any debt, factoring doesn’t actually affect your credit history at all. Your activity with short-term loans, business lines of credit, and credit cards, too, all get reported to the credit bureaus. That’s not the case with invoice factoring, though. Since you provide collateral (the invoice), there’s no debt to report to the credit bureau. You actually might end up benefiting on the credit side, especially if you’re able to pay other bills on time as a result of freed up cash.

Every business financing option  affects your credit rating

If you take away nothing else it should be that your credit history is really, really important. It’s important before you apply for business financing. It’s important after you apply for business financing. But it’s also something you can control.

The bottom line is that every business financing product affects your creditworthiness and overall financial health — but it’s up to you to decide whether it’s a negative or positive effect. The simplest way is to make certain that you’re only taking on the business financing options you can afford. And that’s done by having an airtight sense of your cash flow and sense of how business lenders view your risk.

Start the process now by creating a PayPie account, and then connecting your business accounting software.

PayPie currently integrates with QuickBooks Online. Additional integrations are coming soon.

The information in this article is not financial advice and does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional. 

Images via Pexels

Invoice Factoring: A Beginner’s Guide

invoice factoring beginners guide

The best feeling in the world as a business owner is getting paid. The worst? Waiting to get paid. Whether it’s due to trade credit or delinquent customers, waiting on money is awful. That’s where invoice factoring from PayPie can help as a fast, effective way to free up cash tied up in unpaid invoices.

If you haven’t heard of invoice factoring before, it’s a well-established trillion dollar industry. (For history buffs: The earliest form of invoice factoring first appeared in the Code of Hammurabi from 1754 BCE.) For newbies and entrepreneurs who simply want to be informed — here’s what you need to know about how it works:

How invoice factoring works

Invoice factoring is a fairly simple concept: If a company has one or more unpaid invoices that due from clients, but hasn’t yet been paid to them. Invoice factoring lets businesses sell their invoices to lenders (factors) for the sum of their outstanding balances. You essentially borrow against your outstanding invoices in order to get your money faster — since the factor provides the cash instead of the customer. This creates more financial flexibility, all without a lengthy term-loan application process.

The factor holds onto the borrower’s invoices in exchange for a percentage of the total value of the invoices. The factor is then responsible for the collections process, typically by working directly with the clients who are paying for services. Once the factor is paid, the business receives the remainder of the balance — minus interest and fees.

The benefits:

  • By passing along invoices to a factor, businesses free themselves from lumpy cash flow due to piecemeal payments.
  • This further unburdens the business from being reliant accounts receivable in order to have working capital and cash flow.
  • The factor provides the money up front and handles the back-end work of collecting payment. 

Learn More: Six Reasons Businesses Use Funding 

Five ways businesses can use invoice factoring

Here are some examples of what businesses can do with the money they receive through invoice factoring:

1. Bridging cash flow gaps 

The most vexing issue with unpaid invoices is the uncertainty they create for your company’s cash flow. You know that you have money coming in, but you’re not sure when you’ll actually see it in your account. Invoice factoring helps you take the guesswork out of when you’ll get paid — making it much easier to keep your company’s cash flow steady.

By borrowing against the value of your invoices, you know exactly when you’ll have money in your account. Invoice factoring minimizes fluctuations in your company’s day-to-day finances, all while making it less of an imperative to chase individual invoices in order to keep your business running smoothly.

2. Accessing fast, short-term funding

Keeping your cash flow steady is great. But, sometimes, you need a little extra help with paying for bigger expenses as well, such as payroll or emergency repairs. Instead of panicking when you’re short on operational cash but big on unpaid invoices, you can use invoice factoring to help take care of the little (and big) things that keep your company humming.

Invoice factoring is usually a speedier process than obtaining a business loan or business line of credit. Those loans typically require collateral, extensive applications, and a lag between approval and the disbursement of funds. You can’t always wait that long if you’re short on cash to pay staff, replace broken machinery, or make an office repair.

growth opportunity

3. Using invoice factoring to access working capital

Your company’s cash flow and operational budgeting might be perfectly fine from month to month.  Better still, your clients might be super reliable about paying their invoices on time. But even if any of those factors are true for your business, there may still be moments when you can benefit from having a lump sum that’s delivered to you more quickly than your invoice terms allow.

In these cases, invoice factoring helps you move up the payment timeline. There are also no restrictions on how you use the money — since, in essence, it’s your cash in the first place. You’re free to use invoice factoring to increase the amount of liquid funds on your balance sheet and apply them how you see fit.

More Tips: 7 Ways to Boost Cash Flow 

4. Investing in growth

Another great time to pursue invoice factoring is when you’re ready to tackle a new project, initiative, or large order from an existing or new client. It’s not always easy to invest in the raw material, machinery, or inventory you need when expanding your business. But through invoice factoring, you can convert your existing accounts receivable funds into money that can be used for all of the above.

Even if you would not normally be in the market for invoice factoring, you can always call upon this resource when the unexpected (but exciting) prospect of future business or new initiatives comes around.

5. Building and preserving credit

Invoice factoring provides small business owners with an opportunity to get financing without impacting their credit rating, too. The money you get from invoice factoring a loan, since your invoices are the basis for the exchange between you and your factor. And, if you want to build your business credit, you’re free to use the money to pay off business debts. In these ways, invoice factoring helps you preserve or improve your credit.

What’s a Business Credit Report and Why Should You Care?

Three questions to ask when considering invoice factoring

If you’re considering invoice factoring, there are a few factors to consider. You’ll want to make sure you’re partnering with the right company, and on the right terms for your business. Here are a few of the big questions to consider before entering into an invoice factoring agreement:

1. What are your odds of loan approval?

It is typically easier to get approved for invoice factoring than for other kinds of loan products. With that in mind, you’ll want to consider whether or not you’re likely to get your business approved for other kinds of loans, or if your best bet is to pursue invoice factoring from the get-go.

If you’re considering working with a company, ask them which factors increase or decrease your risk profile, including years in business, previous credit history, the size of the invoices and the quality of your customers and their payment histories.

2. How will invoice factoring impact my client relationships?

Although invoice factoring is common, many factors require businesses to notify their clients about their partnership. Clients will pay invoices to the factor, rather than the business, which can sometimes require explanation and information. Not every small business owner wants to leave this component of their client relationship to a third-party, making a dialogue about invoice factoring beneficial.

3. Which invoice factoring company is right for my business?

Invoice factoring has been around for quite a while. In fact, it’s old enough to have seen a variety of industry-specific factoring companies flourish. Small businesses owners may not be familiar with invoice factoring companies, however, which means that it’s important to find one that has experience working within your field.

If you’re used to waiting 30, 60, or 90 days to get paid, but often need the money in less time than your terms allow — invoice factoring may help you create a steady cash flow, a consistent pool of operating capital, or even an additional source of funds to help take on the next big chapter in a business’ growth.

In addition to invoice factoring (coming soon), PayPie also offers insightful cash flow forecasting cash flow forecasting that includes drill-down screens for accounts receivable and credit risk insights (see below) that show small business owners how potential lenders might assess their company.

full risk profile

All you need to do is sign up for a PayPie account and connect it to your QuickBooks Online account, and you’re good to go.

PayPie only supports QBO at the moment, but integrations with other accounting applications are coming soon. 

The information in this article is not financial advice and does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional. 

Images via Pexels.

How Accounts Receivable Affects Business Cash Flow

business cash flow on tablet

Business cash flow is vital to the health and longevity of your company. Even if you’ve got a million-dollar idea, it won’t go anywhere without money to sustain it.

You also can’t calculate your cash flow with a single number. Instead, you must add together your financing, operational cash flow and investment money to get a clearer picture of how much you have on hand to run your business.

One main figure that falls under the umbrella of operational cash flow is the money from your accounts receivable. A challenge is that 80% of small to medium-sized enterprises (SMEs) often receive late payments. Any amounts tied up in unpaid invoices aren’t counted as physical cash flow until you have the money in hand.

With that information in mind, it should be apparent just how big a role accounts receivable plays in your business cash flow. Here’s why you need to stay on top of these numbers in relation to your cash flow — a task in which we specialize here at PayPie.

1. Accounts receivable isn’t set in stone — you need to manage it as closely as you monitor your business cash flow

Tracking your accounts receivable is always a good idea. Otherwise, you might look at your available cash and think the number is unexpectedly low — if you know you have a big payment on the horizon, though, you can rest assured the money’s on its way.

Until you receive these payments, you cannot consider them part of your business cash flow. Therefore, it’s vital to chase your accounts receivable and ensure the money comes in — otherwise, you might find yourself entirely beneath the benchmark of the amount of cash flow you need.

2. Accounts receivable might clash with accounts payable — if they’re out of synch it affects business cash flow

We’ve already touched on what accounts receivable are. Your accounts payable are all the bills you’re obligated to pay. Just as you give your customers a window in which to send their money, you, too, are on the hook for your rent, utilities, office supplies, etc.

There can be a clash between these two figures if you’re not receiving your accounts receivable in plenty of time to take care of your accounts payable. If your accounts receivable turnover ratio is too high, you might find your cash flow completely strapped when it comes time to pay off your pending accounts payable. A slimmer repayment window for your accounts receivable could be the solution to your problem — in fact, it could save your business.

AR Knowledge: Understanding Your AR Turnover Ratio

3. Outstanding accounts receivable can slow business cash flow and growth

We can’t reiterate enough just how much your burgeoning business depends on cash flow. Without it, you won’t be able to grow your company along with trends, demands, technological updates, etc.

Imagine, for instance, an updated software that can make your job more efficient and straightforward — boosting production and lowering the cost to make your goods. Without enough cash on hand, you can’t pay to upgrade your computers and improve your workflow. With tighter reins on your accounts receivable, though, you might have this money available to keep things moving — and growing.

Another tool to be aware of is invoice factoring. It lets you sell un unpaid invoice to a factor (lender), who’ll immediately give you a percentage of the invoice to help boost your business cash flow — and purchase that much-needed software update. Once the factor is paid by your customer, you’ll get the remaining balance minus interest and fees. (Another perk, unlike traditional term-loans or lines of credit, the use of invoice factoring isn’t reported to the credit bureaus.)

cash flow forecast

Learn More: Invoice Factoring vs Invoice Financing

4. If accounts receivable gets swept under the rug — so will your business cash flow

What’s your company’s collections policy? How many days do customers have to pay you back? What will happen to them if they don’t? These sorts of questions are not only essential to the health of your company, but to the amount of cash you have on hand, too. A weak or passive debt collection plan could spell disaster for your business.

A proactive accounts receivable process will play right into improving your business cash flow. For starters, come up with a system that includes clear guidelines around when and how customers will have to pay you back. You might want to incentivize early payments or penalize late ones to further hasten the process.

A quick invoice creation process will ensure your clients know as soon as possible how much they owe and when. Keeping an eye on notoriously slow-paying customers is something to add to your to-do list.  Some companies also perform credit checks on customers or request a bit of cash upfront as part of their invoicing processes. That way, they have a higher guarantee of their accounts receivable becoming viable income.

Discover: 7 Key Invoice Payment Terms and How to Apply Them

5. There’s always room for improvement

Fortunately, as we’ve begun to note, accounts receivable won’t always be a detriment to your business cash flow and, therefore, to your business. Once you have a well-oiled system in place, you’ll have plenty of money to fund your operations, pay staff and perhaps even expand your business.

Start by shrinking the repayment schedule. Even if your customers pay on time, giving them less time to do so will boost your cash flow and remove the pressure from your accounts receivable department.

In addition to sending invoices ASAP, improve training so your billing department understands all your processes intimately. Knowing company procedures and standards will instantly boost a person’s job performance. Employees will be more likely to do things on time, do them correctly and bring back the money you deserve.

Finally, you can improve your accounts receivable and your business cash flow by adopting the tools and technology to keep tabs on it all. Fortunately, we’ve got that aspect covered here at PayPie. With our forecasting tool, you can transform raw numbers into easy-to-interpret metrics to show where you are — and where you’re going.

PayPie currently integrates with QuickBooks Online. Additional integrations are coming soon.

The information in this article is not financial advice and does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional. 

Image via Pexels

Invoice Payment Terms: 7 Key Concepts & Tips

Choosing Invoice Payment Terms Hero

In business, it’s all about cash flow — customers pay their bills, and the company can buy materials, fund employees’ salaries, cover the rent and utilities, etc. Because this influx of money is so vital, so, then, is the way a company understand and applies invoice payment terms.

Your accounts receivable department is the key to keeping cash flowing into your business and fortifying your company’s financial health. Of course, that task requires more than just an invoice. Using tools like our cash flow forecasting helps you identify the patterns in your accounts receivable cycles.

Even before implementing a simplifying software, you should get to know accounts receivable terms that make invoicing more effective. After that, brush up on tried-and-true tips to help you manage and sustain your cash flow. We’ve got you covered with seven of each.

Accounts receivable terms to know

Knowing the following terms will help you understand and optimize your accounts receivable processes.

1. Quote or estimate

For starters, a customer might come to you without an inquiry before they’re ready to place an order. They’ll ask you how much a particular product or service will cost, even if they don’t intend to buy it right then. You can print out a quote or estimate so that they can compare your services and pricing with other potential companies’ costs.

Of course, the quote won’t be binding, but it should contain the following:

  • Payments: Figure out accepted payment methods.
  • A delivery schedule: How long will it take you to finish the job?
  • Potential variations: How the price could change in common scenarios. For instance, a landscaping service might show the additional charge for the removal of grass clippings.
  • Payment terms and conditions: Will you collect a lump sum, monthly payments, half now and half later or take payment another way?
  • Quote expiration date:  All good things must come to an end, and the deal on an offer won’t last forever.

Even if your price isn’t the lowest, this information might inspire the customer to choose you and your clearly defined terms. In fact, sometimes a higher price can drum up interest in the quality and speed of your service, so don’t undercut value for the sake of a quote.

2. Payment in advance (PIA)

Those in creative sectors (and almost any service industry) should familiarize themselves with the concept of payment in advance (PIA) quickly, as this is a foundational part of service-based invoices.

For example, take a graphic designer with a huge corporate project on the books. Rather than diving right into her design process, she’ll make sure she has a guarantee from the contracting company to ensure they will pay her full bill down the line. So, she uses a PIA, normally 50% of the project’s total cost, to give her the security she needs to get started.

Advances are important to businesses in all fields, though, so you might want to include one on an invoice, especially if you’re working with a new client. PIAs give you the chance to buy raw materials or cover any other expenses that would come out of your account so that you can complete the commissioned project – without fronting the entire cost on your bottom line.

3. Net 7, 10, 30, 90, etc.

When you see “Net” followed by a number on an invoice, it means the seller expects the net payment to be received within that X-day timeframe. So, for example, if a bill sent on August 1 reads “Net 7,” the money should arrive no later than August 8. In most cases, though, it’s considered courteous to give customers at least 21 days to send the money.

Even though the “Net” system is common among proprietors, those who receive the bill might not be as keen to the meaning of it. To make the invoice’s terms crystal clear, you can write something like, “Please make payment within X days.” When it comes to getting paid, there’s no room for being vague.

Accounts Receivable Turnover Paid Invoices

4. X/Y Net Z (benefits for early payment)

This one might seem tricky, but it’s actually quite simple once the letters are replaced with numbers. Let’s say, for instance, that the equation said, “3/10 Net 30.” In this case, X or 3 represents a discount percentage that’s up for grabs. Y or 10 is the number of days in which a client has to pay to receive said discount. So, if they pay within 10 days, they get 3% off of their total bill.

Otherwise, the customer can pay the full amount within 30, or Z days. You can sweeten this deal, of course, or make the repayment window shorter. Again, spelling out the discount’s terms makes it simpler for customers to take advantage of the opportunity, regardless of their familiarity with invoicing terms. “Please pay within 10 days for a 3% discount” should do the trick.

5. Immediate payment or payable on receipt

Not every invoice will give customers an extended period to pay their bills. In most cases, a bill that says, “Immediate payment applies to goods or intellectual property sold.” And, if the money isn’t presented at the time of sale, then you have the right to take back your property from the person on the other end of the deal.

Obviously, this system is excellent for you, as it ensures cash flow as soon as you complete a sale. However, it’s not always a client’s ideal, as they have to produce the cash to pay for the products or services they want.

Read More: Accounts Receivable Turnover — Why It Matters 

6. Line of credit pay

If you’re invoicing for a larger company, you might have the luxury of giving your clients the opportunity to pay through a line of credit. With this system, they can hand over cash installments within a designated timeframe — perhaps, for example, they’ll pay a portion monthly or quarterly until they’ve paid off their bill. For smaller or newer companies, this can be a risk, especially at a time when cash flow is necessary to keep the operation chugging along.

7. Interest invoice

No matter how trustworthy a client may seem, they could still fail to pay a bill on time. For that reason, you should have a plan in place to penalize late payers. Many business owners decide to charge interest on a past-due bill, and, if you go down this route, you should be sure to designate that your invoice is for interest charges.

You’ll be charging interest on the number of days late a bill is. Imagine, for example, that your interest rate is 8%, and that a $2,000 bill is 30 days late. To calculate how much interest is owed, divide 30 by 365, the number of days in a year. 30/365 equals 0.082, which you’ll next multiply by the interest rate, 0.08. 0.082 x 0.08 equals 0.0066, which you’ll finally multiply by $2,000 to get your interest rate. The customer will owe you $13.20, which you’ll collect with a clearly marked interest invoice.

Applying accounts receivable terms

Now that you know what your invoice should include, it’s time to apply that knowledge — in more ways than one. Here’s how to invoice properly and promptly so that you take advantage of your well-written bills and protect your cash flow.

1. Talk before you begin

You should always discuss and agree upon payment terms with your clients before you send them an invoice. This process will help you steer clear of any confusion down the line. It’ll also prove that you conduct business in a trustworthy, transparent way, which has become an important selling point for companies who want to break free from the corporate norm or garner high rankings on customer review sites.

Open communication will boost your customer service from start to finish.

2. Make it yours

When a customer receives a bill, they’re going to glance down and try to figure out who it’s from. How easy is it to see your company’s logo? This piece of recognizable branding will not only connect service with payment but also make your invoice appear more professional. Plus, if a customer isn’t sure where an invoice is coming from, they’re more likely to stall on payment.

3. Write with clarity

The above terms will get you through this point with ease — invoicing should always be done as simply as possible. You can use abbreviations and equations, as long as the client is familiar with what each one means. When in doubt, spell it out.

4. Send the invoice swiftly

You most likely want to improve your invoices so that you get your well-deserved money as quickly as possible. It’s up to you to get the ball rolling though, so make sure your accounts receivable department is sending invoices swiftly.

This speed will also ensure the client remembers who you are and why they’re paying you. Just as we mentioned when suggesting the inclusion of a recognizable logo on your invoice, a customer is likely to hold off on a payment if they don’t know who’s billing them.

Learn More: 10 Best Businesses for Cash Flow 

5. Charge for late payment

We already discussed the interest invoice and how you’d write one up to collect residuals on an outstanding bill. Before you can do that, though, you have to create a late-payment policy that penalizes tardiness. With that rule in place, you’re likely to see customers paying diligently to avoid additional charges.

To that end, advertise any early-payment incentives you’ve implemented too. The X/Y Net Z term described above can help with that, as can a more detailed explanation of this reward. You can conduct such a conversation in person, outline the conditions on your website or even reach out to customers with bills pending to try to hasten their payment with a discount.

6. Be vocal

It’s up to you to make sure you get the money you’re owed. They say the squeaky wheel gets the oil, and the same goes for invoicing — the vocal creditor receives the payment. Don’t be afraid to call customers to remind them they have an outstanding debt to your company. One ring, and your money could be on its way.

7. Put technology on your side

If you’re running a small business, you probably don’t have an accounting department to take care of your invoices. That’s why it’s so important for you to learn the above tips as well as further invoicing etiquette for proprietors like you.

The top tip on that list recommends that you invest in a trusted invoicing software so that you can focus on the areas of your business that need even more of your attention. These programs make all of the above more straightforward, from designing an eye-catching bill to sending them out promptly each month. If you’re getting your payments faster and without as much issue, it’s clearly worth the investment.

Why invoice payment terms are important

You have probably already picked up why choosing the best invoice payment terms is so vital to the health of your business. The bill you send will ensure you receive the cash flow you need to keep your operation up and running. With the right incentives and penalties, as well as a clearly defined window of time in which to pay, you can make it even easier to have that money in hand as soon as possible.

In a pinch, you might also consider relying on invoice factoring to get you through a period of inactivity. This process allows you to outsource your invoices to a third party, known as a factor. They’ll pay you a percentage of your invoice upfront so that you have the cash you need to continue running your business.

Once they receive the money owed on the outstanding bill, the factor will forward you the remaining amount minus interest and fees. Of course, this option won’t be a solution for all companies, but it could help you out of a bind.

No matter which avenue you choose, once the dollars start coming in, be sure to try out our cash flow tool to get a clear picture of how money is moving in and out of your business. You’ll also be able to forecast how much money will be on-hand in the future, which can help you grow and maintain your business like never before.

PayPie currently integrates with QuickBooks Online. Additional integrations are coming soon. 

The information in this article is not financial advice and does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional. 

Images via Shutterstock and Pexels.

Small Business Funding: 6 Reasons It’s Used

Small Business Funding Planning

The idea of small business funding can be — and, frankly, is — a nebulous, overwhelming concept for so many small to medium-sized enterprises (SMEs). Most business owners only look into business financing when they’re in a cash flow crunch. By then, the pressure is on to find a great deal for a loan that your company can afford when you’re in a tough financial position. You can see where this is going, right? That’s not always easy to track down.

One of the savviest moves you can make as you helm your company is learning why you might need small business funding in the first place. Although securing funds can appear to be an arduous process that only applies in emergency scenarios, you might actually be surprised to find out that business financing can be used for more than just bailouts. Knowing your options and applying them wisely can actually accelerate your business’ growth.

6 Ways Small Business Funding is Used

1. Smooth out cash flow gaps

If you work on trade credit, it’s not entirely rare to be in a situation in which you have multiple unpaid invoices out at once without one due anytime soon. (Or, perhaps, some overdue.) When you invoice on Net 30, 60, or even 120 terms, you don’t have full control over how your customers affect your cash flow.

Invoice factoring is a type of small business funding that lets you release money tied up in accounts receivable in order to regain control of your cash flow. With invoice factoring, you’ll essentially sell your invoice to a lender (factor). They’ll pay you a portion (percentage) of your invoice, handle tracking down your payment, and pay out the rest, minus fees, when they get paid in full.

While you don’t get the full amount of your invoice, in this case, it’s far better than having no liquidity at all — and missing payments on necessary overheads like utilities. Experiencing a temporary shut down is likely more expensive than paying a factoring fee.

Although when most people think of business funding, they imagine a big lump sum of cash deposited in your bank account all at once, invoice factoring is different. Actually, very different: It’s a type of asset-based financing where your invoice serves as collateral for the cash. That makes it much more accessible for the average small business owner — both in terms of time-to-cash and qualification criteria. The approval times are faster, too.

Insights: The 10 Best Businesses for Cash Flow

2. Hedge against seasonal downturns

The reality of being a seasonal business is that you don’t make steady money year round. Say you provide edible flowers to restaurants on Martha’s Vineyard. Not only are you beholden to growing seasons, but also tourist high seasons, too.

Your business might do very well during your peak months. But, even then, your revenue has to fuel both your operating expenses throughout those months and act as a kind of bridge to the next peak season. Do your cash flow forecasts say you’ll make it? (Our forecasting can help you assess your risk of missing the mark.)

If not, you can use your small business funding to help tide you over. It’s not a shameful thing to do — in fact, it’s a smart investment in your company’s future. If you do apply for business funding to supplement slower revenue periods, make sure you apply before sales get slow. Lenders will evaluate your cash flow and business bank statements, so you want to prevent the strongest financial picture possible.

3. Invest in opportunities

Nothing seems like an opportunity that’s too good to pass up — until you get your opportunity that’s too good to pass up. Instead of kicking yourself that you don’t have the available cash to seize whatever that is, consider using small business funding to help.

Size up the pros and cons of each option, then determine its potential for returns. For instance, maybe you need to finance inventory for a guaranteed high-volume purchase order to get in new retail doors. In that case, there’s a good chance the debt you take on will pay for itself.

Think of this kind of short-term small business funding, then, as an investment to accelerate growth.

According to the 2017 C2F0 Working Capital Outlook Survey, 28% of SMEs would expand operations with additional cash flow and another 9% would invest in research and development.

Small Business Funding Ball of Cash

4. Upgrade, renovate, or expand

Something is always changing around you, whether it’s your customers’ tastes and preferences, industry technology, or market shifts. The sink-or-swim nature of business means you have to evolve too. Which, of course, isn’t free.

Replacing the ovens in your bakery? Expensive! Giving your dated showroom a facelift? Very pricey! Opening an additional studio in a newly developed, high-traffic area? (Your turn.)

Some of these capital-intensive projects simply aren’t possible with the amount of capital most entrepreneurs keep liquid. These one-time costs are prime reasons entrepreneurs choose to apply for small business funding.

Tips: 7 Ways to Boost Cash Flow 

5. Access working capital

Working capital is a big, blanket term for money that can help you out in the short-term — in other words, everyday expenses or growth projects that you don’t consider investments or longer-term expenses.

Maybe you know you need to hire a marketing coordinator in the next two months. However, the numbers on your balance sheet say that you’re not going to have a full-time salary worth of cash to offer her until eight months down the line. Then a working capital loan can help you with growth expenses (including her computer, and some swag to make sure she feels like part of the team).

6. Address the unexpected

And, yes: Small business funding is great in an emergency. You know that nightmare you had where you thought your store flooded, but it was just the sound of toilet running? Well, should that nightmare one day come true, you can use short-term small business funding options to help clean up the resulting (financial) mess.

That said, it’s always a thousand times more ideal to have cash on hand before you need it. The last thing you want to be dealing with in a business-threatening emergency is tracking down business financing, too. More on that in a moment.

Read More: Short-Term vs Long-Term Business Financing

Two things to remember about small business funding

1. If possible, apply before you need capital

You can’t always see the need for money coming, especially if you’re using it to fix a problem. As we’ve gone through, a good number of the reasons you’d be looking into small business funding don’t have anything to do with crisis management at all.

To find the best business funding for your company’s needs — the right amount, the right product, and at the best rate — start your search well before you need it. Begin during your peak season if you’re a seasonal operation. Apply before you know the cost of your raw materials will rise. Or, you spot indicators that your industry might come up against some hard times.

Maybe even consider having a business line of credit in your back pocket to use when you need it. Since you don’t pay interest on funds until you draw against them, it’s a great tool in those situations that you can’t predict. It can be helpful for working capital, too.

2. Have a good sense of your cash flow

Most importantly, applying for small business funding all comes back to having a good sense of your cash flow. If you don’t manage your cash flow effectively and forecast your cash flow properly, you can’t know what you’ll be able to pay for now or down the line.

Start tracking your cash flow today. All you have to do is sign up and connect your accounting software. The more you know about your cash, the better equipped you’ll be for growth and overcoming the unexpected. Like they say, follow the money.

PayPie currently integrates with QuickBooks Online. Additional integrations are coming soon. 

The information in this article is not financial advice and does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional. 

Images via Pexels.

Business Line of Credit: The Basics

When you hear “business financing” what comes to mind? We’re not psychic, but we’d be willing to bet that the first thing you thought of was a traditional term loan. That makes sense as they’re a commonly used option.

However, you should also know about a business line of credit and how it’s used to manage cash flow. A versatile way for small to medium-sized enterprises (SMEs) to get the working capital they need — its use-what-you-need-as-you-need-it structure is what makes it distinct.

How a business line of credit works

Think of a business line of credit (revolving line of credit) as a hybrid between a loan and a credit card cash advance. To begin, you work with a business lender to get approval for a fixed sum of capital.

The next part is the biggest divergence from a traditional term loan:

  • Although you can use up to the full amount for which you’re approved, you don’t have to.
  • You can make what’s called a “draw” —  borrowing an amount you choose.
  • You only pay interest on the amount you take from the full line of credit.
  • Once you’ve paid back any amounts drawn, they’re available again for future use.
  • When you need capital, you simply draw against your approved credit line.  Draw up to your limit or just a specific amount — it’s up to you.

Read More: Separating Business and Personal Finances 

How to apply for a business line of credit

Qualifying for a business line of credit isn’t as difficult as many other business funding products. Generally, these applications require less paperwork and financial history than term loans.

Many of the lenders who offer other types of business financing — both banks and online lenders — also offer business line of credit products. (Banks are more selective than online lenders, as expected.)

Requirements vary from lender to lender:

  • Some lenders care more about your revenue and personal credit score.
  • Others, about your time in business.
  • In general, a combination of these three factors is used to evaluate your risk as a borrower and determine your eligibility and terms.

Prior to applying for a business line of credit — or any business funding — you’ll need to know a few things solidly:

  • First, your personal credit score, which will play a big part in the approval process.
  • Next, basic business financials: At a minimum, your revenue and your business bank account balance.
  • Most importantly — you need to have a thorough sense of the cash going into your business and the cash going out.

Cash flow is among the best indicators of a business’s financial health, so lenders will be looking. Our cash flow forecasting is a powerful tool to get your cash flow picture — and it includes a risk score based on your current financial data.

How a business line of credit is set up

Hearing like a business credit card might make you think that these financing tools aren’t powerful.

But, business lines of credit can go into the millions of dollars — and major corporations have different types of business credit lines at the ready. For instance, Facebook established an $8 billion line of credit before it went public in 2012. (Sure, that’s not quite the same stratosphere — but you see what we’re getting at.)

As an SME, you’ll work with a lender to get approved for an amount that makes sense for your business.

  • Many lenders establish a line of credit for as little as $5,000.
  • Because you don’t receive any money up front, many business lines of credit are unsecured.
  • For larger amounts (sometimes upwards of $100,000, though this is dependent on your lender), lenders will occasionally issue a blanket lien to collateralize your loan.

Where to get a business line of credit

To get a business line of credit, you can either:

  • Go through a bank that will have stricter financial requirements but better rates. It also might take slightly longer than an online lender but will still be faster than a term loan.
  • Use an online lender that will be more lenient requirements but charge higher interest. If you’re qualified, you could see approval in fewer than 24 hours — which means access to funds in just a few days.

An example of how a business line of credit can be used:

Maybe you own a boutique fitness studio, and the carpet in one corner of your main exercise room is worn away. Replacing the carpet overnight will cost $1,400.

With a line of credit of, you can draw:

  • $1,400 for the full cost.
  • $1,000 and take the other $400 from the cash you have on hand.
  • $1,500 just in case the job cost goes over.

Basically, the draw is at your discretion. Whichever you decide, you’ll only pay interest on the amount you draw.  The unused amount on your line of credit isn’t subject to any interest and is still accessible at any time.

Your lender will assess repayment terms when you’re approved for your business line of credit. That includes an interest rate as well as a period in which your draw must be repaid, plus that interest. Generally, that time frame falls between six to 12 months (again, it’s specific to your lender).

Learn More: Basic Cash Flow Concepts and Terms

A business line of credit is revolving credit

Most business lines of credit are what’s called “revolving.” This means that once you’ve repaid the full amount you’ve borrowed, they re-up. You’ll have access to the full amount again. This makes them a fantastic tool to keep in your back pocket, so to speak.

Business Line of Credit Secondary Image

5 advantages of a business line of credit

1. It works with other business financing options

Because many business lines of credit are unsecured, SMEs are able to use them in tandem with other secured loans.

With other kinds of business financing tools, taking out multiple collateralized loans — what’s called “stacking loans” — is not only bad for your credit as a borrower, it can also violate the terms of your initial secured loan. That means you automatically default.

A business line of credit, however, is designed to work with other types of business funding products. By definition, it’s an extremely flexible financing product for working capital.

It works well alongside a term loan you’ve taken out to build an additional location or to supplement additional unforeseen expenses. Or, if you use invoice factoring to release money tied up in trade credit, a business line of credit is the logical partner to accomplish whatever you need to during cash flow crunches.

2. It has interest rates you can work with

No one likes paying interest, of course. But, it’s much better to pay a little interest rather than a lot.

We mean that in two ways: First, as a borrower, you won’t pay interest on anything more than you draw. As you monitor your cash flow with cash flow forecasting, you can make informed decisions about how much interest you’ll be able to handle. And then, of course, only draw funds based on what you’re certain you can repay. (Assuming you’re using your money for an investment, not an emergency, naturally.) This calculated approach isn’t only great for building credit, but it’s also the mark of a financially responsible business owner.

Secondly, even though interest rates will vary depending on your lender and creditworthiness, generally, your business line of credit annual percentage rate (APR) will be less than the one on your business credit card. Having access to a business line of credit will save you money in the long run so you’ll never have to carry an expensive credit card balance.

3. It’s a credit-building tool

One thing SMEs know better than anything: Credit rules everything around you. Or, at least, enough that you have to make certain your credit report is as good as possible — and, if it isn’t, that you’re constantly trying to improve it.

A business line of credit can contribute substantially to building your credit. By borrowing against your credit line and paying back the amount in full and on time — the same way you would a credit card bill — you help prove responsibility with debt. That incrementally raises your credit score (risk profile) and will help you open doors for your business.

Cash Flow 101: The Difference Between Cash Flow and Profit 

4. Once it’s approved, the cash is always available

Once you’re approved for your line of credit, you don’t even technically have to use it. Sounds strange to say, but it’s true. It’s unlike other types of business financing in which once you’re approved, your clock starts ticking on your repayment and your interest starts collecting on your entire sum.

Many business owners have a business line of credit simply to know they have it. That way, they can pursue whatever they need and not have to worry about their cash flow situation. In a way, it’s similar to invoice factoring — a resource you know you always have at your disposal, but don’t need to tap into unless you choose to. And, if you do so strategically, can be a savvy move.

5. It’s useful for growth or emergencies (or both) 

A business line of credit is arguably the most flexible financing product on the market. Since it’s a working capital loan, you’re not tied to one use case for the money. Essentially, if you have an expense, a business line of credit can likely address it.

That means it’s as useful for financing investment and growth opportunities as it is for addressing disasters. For instance, if you run a tutoring center, you might draw from your credit line to hire new staff to add services for STEM programs, including computer science and robotics tools and applications. But, you can just as easily use the money to buy a new window ASAP when a robot war gets out of and casualties ensue.  

A few closing thoughts…

As ready as you might be to spring into action and apply for a line of credit, make sure you’ve done due diligence… on yourself. You know lenders will be scrutinizing every last decimal place of your financials, right? Then you better be doing the same.

Open up your own tool chest and use the best possible equipment you have to get a sense of what kind of assets you have — and what kind of borrowing risk you’ll pose. As we mentioned, cash flow is the best place to start so you can understand how likely you’ll be to pay off your loan balance.

See how the money is flowing in and out of your business and how potential lenders view your business in terms of risk. Getting started is easy: Simply create a PayPie account then connect your business accounting software.

PayPie currently integrates with QuickBooks Online. Additional integrations are coming soon.

This article is informational only. It does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.

Images via Pexels.

Managing Cash Flow for a Seasonal Business

cash flow for a seasonal business ice cream truck

Cash flow is difficult enough to master on its own, but your business is different than the usual — it’s a seasonal operation. This makes cash flow all the more vital to the livelihood of your company since money’s only coming in during certain times of the year.

Of course, yours isn’t the first business to operate on a sporadic or seasonal basis. Because others have gone before you, plenty of tips are out there so you can be sure you’re really harnessing the power of your cash flow. Plus, you have the power of PayPie on your side — we know how to help you manage your cash flow for a seasonal business.

Here are seven tips for managing cash flow for a seasonal business:

1. Set up a line of credit

Regardless of your cash flow, you never know when your operations will require even more money than expected. That’s why you should always apply before you need it — you won’t want to scramble when you realize you’re in a pinch. Especially because banks won’t be thrilled to lend to a company that doesn’t have cash coming in at its current juncture. Apply now to prepare for whatever may happen.

Once you’ve taken all the steps to set up your line of credit, you’ll be much more adept at handling emergency situations, should they arise. Many companies will take out loans at this point to cover their bases, but beware — the interest rates on these sums might be high. With a line of credit established long before a do-or-die moment, you’ll probably have much more reasonable repayment fees. It’s simply a smart tool to have at your disposal.

2. Put invoice factoring on your radar

Sometimes, even with the best planning, a cash flow crisis can happen. You made a huge sale in the busy season and dipped into your resources to do so. Now that things are slowing down, the payment still hasn’t come in. If you need a solution that’s faster than applying for traditional loan or line of credit, consider invoice factoring to help manage cash flow for a seasonal business.

Invoice factoring helps you turn unpaid invoices into funds by letting you sell your invoice to a factor (lender), who, in turn, pays you a set percentage of the invoice. You receive the balance, minus fees and interest, once the customer pays the invoice.

More Tips: 7 Ways to Boost Cash Flow 

3. Audit your expenses

To make the most of your cash flow for a seasonal business, you should scrutinize any and every expense required to sustain your operations. Even though much of your money will, indeed, be necessary to spend, you might find little places where you can trim the fat. Something as simple as an online subscription service for $15 a month that’s left to renew during the off-season automatically can add up to a sizeable — and worthless — expense.

You might have to reconsider the size of your staff and their location, too. Renting a space for an entire year that you don’t need or keeping employees on the payroll even when the season’s over will add up. At a certain point, you can’t justify it — even if your business is staying afloat.

4. Diversify your offerings

Your seasonal business is fruitful, but the off-season is tough. Perhaps there’s an answer to your problem in the form of a complementary product or service that will appeal to your customers when you usually are unable to work.

Think about it — cruise ships sail south for summery escapes to the Caribbean, but they also voyage north so passengers can see New England’s changing leaves or icy Alaskan landscapes. Bustling resorts become locations for company-wide retreats, attracting business year-round with discounted rates to host conferences in the off-season.

Of course, not every operation will have a clear seasonal opposite that will also bring in money. In that case, brainstorm to see if you can come up with something unrelated, but economically viable. However, it’s best if you can use your pre-existing resources and team, so try not to veer too far from your initial business plan.

cash flow for a seasonal business life preserver

5. Build an emergency fund

We’ve already discussed why you should open your line of credit ASAP. At the same time, start building your emergency fund now, so you have cash available in tight spots. Industry experts tend to suggest an emergency fund with at least one month’s worth of operating costs. Don’t be too optimistic about the amount of cash you’d need in such a situation, either — it’s better to be overly prepared than ill-equipped for a drought.

There are plenty of tips for entrepreneurs building an emergency fund — something as simple as gathering coins in a jar can add to your cash flow for a seasonal business. Of course, more substantial efforts like working with a financial advisor or using online tools to tally up your stockpile will make more of a difference. No matter how you do it, setting this money aside and considering it untouchable in your mind is the key to having funds when you need them.

Read More: 10 Best Businesses for Cash Flow 

6. Use downtime to your advantage

Another way to maximize cash flow for a seasonal business is to look at your downtime in a completely different way. Rather than putting your feet up and coasting until the high season resumes, improve your skills and business acumen.

For many entrepreneurs, this means taking classes and enhancing knowledge, so it’s no longer necessary to outsource those tasks that keep your business running. For example, you could sign up for a video editing course and start making your own online marketing clips, rather than hiring a team to film and create content for you. Training your employees to do more can improve turnover rates and boost their sense of accomplishment, among other benefits.

Another way to slash costs in the interim is to do your research. Reach out to different suppliers to see if you can find someone who will give you what you need for less than what you’re paying now. Then, you can even try renegotiating existing contracts with this knowledge. You have nothing but time during the off-season — use it to your advantage.

7. Know your cash flow

No one is more familiar with the inner workings of your business than you. Implement the any of the tips above to your best judgment or come up with other ways to save cash in your off-season.

Whether your managing cash flow for a seasonal business or any business, cash flow forecasting is an invaluable tool. It gives you insights into exactly how and when money is coming into your business or flowing out to cover expenses. It will also help you more accurately identify the timing of your peak income periods.

The more you know about your cash flow, the better you’ll be able to manage it. This is the main reason we created our free cash flow forecasting tool. You work hard and we work hard to give you the tools you need to keep your business healthy.

Discover our cash flow forecasting and other cash flow management tools today.

PayPie currently integrates with QuickBooks Online. Additional integrations are coming soon.

This article is informational only. It does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.

Images via Pexels