Traditional Term Loans: Understanding The Essentials

term loan main image

Whether or not you realize it, there’s a high likelihood that you know what a term loan is. Or at least understand the concept. (We’ve talked about them before here at PayPie.) Term loans are the most traditional type of business financing available, where you work with a lump sum of capital and repay it in fixed installments along the way.

Term loans are great products — but not for every use case or every business owner. There are, however, ways to know if and when you should apply, or if there’s a better alternative available.

How term loans work

With a business term loan, you work with a lender to obtain a lump sum of capital that you borrow for a predetermined amount of time. You work out terms with your lender that are contingent on your creditworthiness, business history, and the amount of capital you ask for. And, once approved, you receive all of the cash at once.

Every lender will want to know what you’re doing with the money before you get the green light. But some term loans have restrictions on what you can and can’t do with the money, while others don’t.

But, essentially, term loans are business loans in the most traditional sense that most are used to when they think of financing. You borrow money, and you repay it through fixed payments, with interest, until your set term is up.

Short- and long-term business loans

Term loans come in a few flavors, so to speak. Short- and long-term business loans differ in — you guessed it — their term (how long you have) to pay back the money.

With short-term loans, you’ll generally have faster access to capital with shorter approval processes and less stringent requirements for qualification. The tradeoff is that the terms are less favorable. That means a higher interest rate and a shorter period by which you’ll need to pay back the cash. A short-term loan is generally a loan that lasts less than a year, though they can sometimes extend to around 18 months. Repayment on short-term loans is also usually daily or weekly.

With medium- or long-term loans, the process slows down. As you’d expect, these have longer repayment periods than those of their shorter counterparts, sometimes by several years. They often lower interest rates, too.

As a result, though, these loans only go out to more qualified borrowers, and the underwriting process takes longer. After all, a bank or alternative lender doesn’t want you to have their money for years if you’re not going to be responsible with it. On these term loans, you’ll generally have monthly repayments.

How Cash Flow Forecasting Maximizes Business Funding 

business term loan secondary image

Term loans vs. other types of business loans

Although the most traditional type of business financing, term loans aren’t the only kind, of course. These are a few common alternatives and their most relevant uses:

  • Business line of credit: Instead of a lump sum deposited into your bank account, a business line of credit works as a sort of hybrid between a credit card cash advance and a term loan. You’ll work with a lender to get approved for a sum, but you only use what you need — and only pay interest on what you draw. It’s a great solution for many business owners who want access to fast capital, but don’t necessarily want to have a large interest payment looming over their heads.
  • Invoice factoring: An expensive short-term loan isn’t usually the best solution for an entrepreneur with liquidity issues. Invoice factoring lets you sell unpaid invoices to lenders (factors) who’ll pay you a percentage of the invoice, work with the vendor to collect the balance and return the rest to you, minus interest and fees, when the balance is paid. It’s an excellent alternative for capital tied up in trade credit, and generally more cost effective than other types of shorter-term financing.
  • Equipment financing: If you don’t need working capital, and are rather looking to finance a specific purchase of gear for your business, you should consider equipment financing. As what’s called a “self-collateralizing” loan, equipment financing uses the equipment funded with the money you borrow to secure the loan. For that reason, some borrowers with less-than-perfect credit can obtain this type of business financing.

The 5 C’s of Business Credit Explained 

The best uses for a term loan

You can seek a term loan to finance a lot of different scenarios over the life of your business.

For one, a term loan is a good source of working capital. In other words, you’d borrow from a lender in order to have a source of money to spend freely on general day-to-day operating costs (as opposed to directly investing into an asset). If business owners are in a cash pinch, it’s fairly common to seek out short-term financing in order to supplement their cash flow.

Times when short-term loans make sense include:

  • Making payroll or paying taxes.
  • Funding a marketing campaign.
  • Opening up a new location or expanding into a new market.
  • Financing the creation of a new product or service.
  • Covering a one-time expense, like an emergency repair.

Longer-term loans are also good for specific investments or asset purchases. You can also use a term loan to refinance existing debt — meaning if you have an existing loan and you’re in a better financial position with better credit history, you can work with a lender to refinance into a less expensive product with more favorable terms.

6 Ways Business Funding is Used by SMEs

And when you wouldn’t want to apply for a term loan

Taking on debt is never preferable, of course. But if you’re going to apply for business financing, the benefit of a term loan is its predictability. You apply for a fixed amount of money. And, when you work with a lender, you’ll know up front how much you’ll owe each month, plus how much the loan will cost you by the end in terms of its interest plus principal.

If you’re not entirely certain that your investment will yield results, or you’re in a somewhat precarious financial position, taking on a term loan might not be advantageous. There are other financing instruments, like those we mentioned above, that could be a better fit for you.

Additionally, term loans almost always require collateral. You want to make certain that you don’t put your business in a situation in which you’re taking on debt that you aren’t sure you can afford. That puts your collateralized assets at high risk — and could ultimately jeopardize your entire company, especially if your lender requires a blanket lien on your tangible assets.

How to apply for a business term loan

If a term loan is a fit for your business’s needs, you’ll need to work with a business lender to obtain financing. You have a few options: You can go directly to a bank or credit union, or work with an online lender (alternative lender).

A bit of context is helpful before we go further, though. Small business lending took a big hit during the 2008 financial crisis. And although Main Street lending rehabilitation was meant to be a  mandatory provision within the government’s Troubled Asset Relief Program (TARP) bailout, rehab help never quite made it into practice. Ten years later, the vast majority of American small business owners still find it very difficult to get loans from institutional lenders like banks. They can be picky with their candidates — and they are.

While that little recap covered the United States, SMEs around the world face similar challenges accessing funds through institutional lenders. Worldwide, there’s an unmet funding need of $2.1 – 2.5 trillion.

See our comprehensive list of cash flow statistics.

Where to look for a term loan

Let’s start with those bank loans. If you have several years in business, strong and consistent revenues with a consistent track record, and excellent credit, you could be a good candidate for a bank loan. As a new business, you’ll definitely need to look elsewhere. Because banks don’t lend out much money to small business owners, they can be choosy — and they’ll choose the least risky candidates. To them, that means ones with proven dependability with debt. An existing relationship with a bank is often helpful, too.

Alternatively, online lending has emerged in recent years as a response to the lack of available capital for small business owners. Qualifications won’t be as stringent with most online lenders, but their terms will be slightly less favorable as a result. You can apply for term loans directly at lenders’ websites, or through online loan marketplaces, who can submit your information to multiple lenders at once.

Recurring Revenue — 5 Proven Models

What lenders look for in a qualified term loan applicant

The most important thing to remember when trying to understand business loan application requirements is the lender’s job. It’s all about mitigating their risk.

There’s no way to conjure the future in a crystal ball to know whether or not they’re going to get back their money — that’s impossible. So, when evaluating your application, they have to make the decision based on your odds of paying them back. That’s all derived from your track record. And, since they haven’t known you for years and can’t sample just how good your product is or meet you to understand just how trustworthy you are, all they can judge are things including:

  • Financial statements, including your cash flow statement, balance sheet, and income statement.
  • Recent business bank account statements.
  • Credit rating — both personal and business.
  • Tax returns — both personal and business.

As with all business loans, requirements for term loans will vary from lender to lender.

As we mentioned before, banks and credit unions will require very strong financials. You’ll nee high credit scores (generally very good to excellent) as well as more than a couple of years in business under your belt with good earnings so they’ll have financials to analyze. Online lenders might require slightly less solid credit or revenue numbers and a little less time in business.

That said, term loans aren’t the best options around for new businesses. Most lenders require some established financial track record for your business to qualify. Startups simply don’t have that.

5 Stories Your Financial Statements Tell 

The relationship between term loans and cash flow

There’s a deep connection between term loans and your cash flow. It starts before you even apply for one of these financing instruments, and continues after you’re approved.

Why lenders care about cash flow

Cash flow is an extremely important metric for small business lenders and loan underwriters. It’s a make-or-break factor that’ll determine whether or not you get approved for your loan.

And if you think about it, that makes sense — your cash flow reflects the money you have available to cover your loan payments. Lenders will evaluate your cash flow statement to make sure you consistently have enough cash on hand to cover both your operating expenses and your debt.

Before you apply for a small business loan, you’ll want to have been keeping a detailed cash flow forecast. It’s one of the only dependable ways to know if you’re in a position to take on the financing you think you are. In other words, see what lenders see — don’t be surprised!

Reporting, cash flow and business financial health

Where you’ll see your loan payments reflected

Got approved for a term loan? Great! Make sure you know where it’s showing up so you make sure you do make those loan payments and don’t fall behind. And, as we’re sure you’re unsurprised, your financing will appear on your cash flow statement, too.

What’s called your cash flow from financing activities (CFF) encompasses these outflows. At PayPie, we recommend running a cash flow forecast (like the one below) every month so you can see how your business’s CFF is affecting you.

cash flow management main dashboard

How to improve your cash flow position

No matter where you are in the term loan process, make sure you have your cash flow processes zipped up tight. An in-depth cash flow forecasting tool will help you on either end.

  • If you haven’t yet applied for a term loan — understanding the trends in your business and creating a forecast will allow you to get your finances in the best possible position for approval. And to get better terms for a less expensive loan.
  • If you’re ready to apply — have as many insights into your cash flow as possible so you never miss a payment — and you know as fast as possible if you’re going to come upon a cash flow gap.

Spot risk now, thank yourself later. PayPie’s insights and analysis also provide you with a risk score, based on numerous data points, that shows you how creditworthy potential lenders and business partners see you.

Signing up for PayPie is easy. Just create your free account, connect your business and run your forecast.

PayPie is currently compatible with QuickBooks online, and more integrations are in the works.

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.

Free Cash Flow: A Deeper Look

Free cash flow change jar

At PayPie, we often talk about how cash flow is the best indicator of your business’s financial health. (And we truly mean often.) But there’s a metric within the bigger umbrella of cash flow that drills down on your survival odds as a company: Free cash flow.

Free cash flow lets your business really see what kind of cash your company has available to work with after it pays for operations and capital expenditures. It’s a bit less straightforward number than just looking at an income statement. But, if you do the legwork, like running regular cash flow forecasts using our insights and analysis, you’ll have an invaluable perspective on whether your business has the runway to invest — and the potential to grow.

Free cash flow defined

Most simply, free cash flow is the remaining portion of your business’s cash flow that you can safely access after the necessary expenses are paid for. Most often, it’s mentioned into context what you can “distribute.” But as a small business owner, you don’t need shareholders for that to be relevant.

Distributions include payouts to equity holders (including yourself as the proprietor of a business), but also those who hold debt (like any business lenders or other debtors), and any investors if that’s relevant for you, too.

Importantly, free cash flow is a short-term metric.

How to calculate free cash flow

Grab your most recent cash flow statement. There are a few different ways to calculate free cash flow, but the most straightforward among them is: 

Net Operating Cash Flow – Capital Expenditure = Free Cash Flow

Wherein operating cash flow (OCF) means:

  • Cash you make from business as usual, minus your long-term investments and taxes.
  • OCF takes into account depreciation expense by adding it back in.
  • You can find your OCF number on your cash flow statement.

Wherein capital expenditures (Capex) means:

  • Cash you’ve spent on capitalized fixed assets, including expanding, upgrading, or maintaining your systems, equipment, space, etc. for business
  • Capex takes into account depreciation expense by adding it back in
  • You can find your Capex number on your cash flow statement in the “investing activities” line

Read More: An Overview of Cash Flow Basics 

analyzing cash flow and free cash flow

How free cash flow differs from net income

If this sounds a bit like your net income, you’re not off base — but free cash flow has an important difference. Your net income takes into account depreciation. (The free cash flow formula adds depreciation back in, as you can see reflected above.)

For instance, say you make a big purchase on a commercial oven for your organic granola company. But you have to pay for it all up front. Although your net income, which you pull from your income statement, will give you one number that factors in depreciation, your free cash flow will indicate a different total. Since your free cash flow gives you a snapshot of the short term, you’ll see a more constrained cash flow number because you paid in a lump sum.

Depreciation is set up within the mechanisms of accounting by design to lessen the blow of a big asset purchase. (The IRS’s term for this deduction is “cost recovery.”) On the other hand, free cash flow’s this-very-second approach to your spending makes sure your costs are recorded as they happen — that’s why depreciation is handled differently. In short, with cash flow, you want to see how that big expenditure affects your bottom line ASAP.

More Tips: The Difference Between Cash Flow and Profit 

What your company’s free cash flow can tell you

Free cash flow is meant to be a short-term metric — and it is. You can learn a lot about your financial solvency as a company, both the now and future, if you contextualize your numbers correctly.

Free cash flow in the short term

Calculated once, your free cash flow gives you a pretty solid sense of your business’s true liquidity or ability to meet its current and near-term financial obligations. And that’s important. If you’re planning to distribute earnings or wages (including to yourself — an entrepreneur can only eat so much ramen). You also need to be able to do so knowing that it won’t happen at the cost of keeping the lights on.

Plus, if you have outstanding business loans — or even business credit card bills — understanding what you’re able to siphon off your cash reserves is essential. Especially if you have something like a business line of credit, wherein you have, say, a six-month window to pay back what you borrowed. Knowing you have the cash to pay back your lender now means you don’t have to worry about extra fees, penalties, or interest.

Free cash flow in the long term

As with most financial metrics — and data in general — the more free cash flow calculations you have, the better. If you see an upward trend in your company’s free cash flow, it’s a strong hint toward growth. It also gives you the opportunity to invest and reinvest in your company.

Since no one number tells a complete story, you’d have to dig into P&Ls and balance sheets to figure out what’s going right. Maybe you’re doing a good job at keeping your costs low as you’re able to increase your prices relative to market competitors. Maybe you’re expanding your customer base and lowering your customer acquisition cost (CAC) in the process. Whatever you’re doing, consistently increasing free cash flow generally indicates positive financial health.

On the other hand, a downward trend in free cash flow over a longer period of time will be able to raise your red flag. Why are you experiencing an earnings decline? Are you managing your assets efficiently and investing the right way? (And do you need help turning things around?)

Read More: The Stories Your Financial Statements Tell 

Why free cash flow matters

If we asked you, How’s your business doing? You’d have one answer to the question. If we asked an outside evaluator to come in, thumb through your exact same financial statements, and respond to the prompt, they’d very likely have something different to say. It has nothing to do with you. Rather, there are lots of ways you can read and interpret the stories your financial statements tell.

Cash flow is already among the least gray financial metrics to interpret. Your cash position paints a straightforward picture — either you’re cash flow positive or cash flow negative. (And the more work you do creating cash flow forecasts with insights from PayPie, the quicker you can make adjustments so the latter never happens.)

But even within cash flow, there’s something called a cash “smoothing” effect which can change the accuracy of your cash reporting. Some businesses use accrual basis accounting (versus cash basis), which reports and records both revenues and expenses as they happen, not when they’re received or incurred. That can sometimes cause a less accurate representation of their short-term cash. This is that smoothing, which essentially spreads (aka smooths) this cash data out over a longer period of time.

The numbers your accounting data provides is still entirely accurate in terms of net income — don’t worry. But free cash flow takes into account that smoothing and attempts to mitigate it. As a result, it’s harder to manipulate.

Hence, free cash flow is an even more precise way to get a sense of a business’s available cash. (It’s even a favorite metric for investors evaluating Wall Street securities, so you’ll be in good company using it.)

Gathering as much cash flow data as possible

If you research more about free cash flow, you’ll find there are quite a few more ways to calculate it and apply it to corporate finance. We’ll advise you not to worry about the others as a small business owner. (They’re a bit more in the weeds, geared toward huge public companies with lots of shareholders.) Just the general overview of free cash flow will be enough for you to understand more about your business’s assets at a deeper level.

That said, we did say more data is better, right? And we stand by it. Because there are many cash flow insights that are immensely helpful for you to make better data-based decisions every day as a business owner.

PayPie’s cash flow forecasting tools provide the deep, nearly up-to-the-minute numbers to help you make the best calls for your company by pulling your latest financial information directly from your accounting software.

cash flow management main dashboard

Signing up is easy, and QuickBooks Online users can connect easily connect their businesses. (Not a QBO user? More integrations are on the way, too.)

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. 

How Cash Flow Forecasting Maximizes Business Funding

Cash Flow Forecast Increasing Focus

You’ve probably considered business financing to help fund a new project or fulfill large orders. However, you might not know how important cash flow forecasting is in the approval process.

The fact is: Cash flow forecasting makes a huge difference to lenders. The more stable your business appears in the present and future, the more likely you are to get approved.

Getting a financing comes down to looking like a solid candidate in the eyes of your lending partner — the safer (less risky) your company appears, the more attractive you are as an investment.

Cash flow forecasting, like the kind offered by PayPie, gives prospective lenders a glimpse into what kind of operating capital your company has on hand and will have in the future. This demonstrates your ability to afford loan repayments, as well as the longer-term solvency of your business.

What cash flow forecasting helps you achieve

Before we dive into how cash flow forecasting maximizes business funding, let’s get into the details of how cash flow forecasting works. A cash flow forecast uses your current cash flow numbers to pinpoint strengths and weaknesses. When produced at regular intervals, such as each month, cash flow forecasts help you better predict your company’s future performance.

1. It pulls together metrics from your main financial statements

Using financial information from your income statement, balance sheet and cash flow statement, cash flow forecasting, like one created using PayPie,  helps you get the full picture of your finances. It does so by analyzing these numbers and providing a highly visual, easily understood report containing relevant ratios, charts and graphs.

2. It helps you measure and set benchmarks

If you’ve set benchmarks based on previous cash flow forecasts or through your cash flow budget, each new forecast you create gives you valuable insights into how well your company performed against these benchmarks. Cash flow forecasting can also help you fine-tune your benchmarks or set entirely new ones.

3. It tells you how much financing you can afford

Another pattern or trend that cash flow forecasting helps you visualize is where you stand in terms of financing. It can tell you how well your managing existing repayments. And if you need or plan to borrow additional funds, forecasting shows you how much new financing you can afford.

Read More: Essential Cash Flow Basics 

learning from cash flow forecasting

How cash flow forecasting helps you determine which business financing option you need

Cash flow forecasting doesn’t just help entrepreneurs visualize how money is moving in and out of their businesses. It also helps determine what kind of business funding you need in order to reach your goals.

Small business financing products are not created equal — some, such as a business line of credit, are better suited toward recurring situations in which you might need extra capital. Others, such as a working capital loan, provide companies with a one-time payment to help pay for general expenses across the entire business.

If getting funds quickly is your primary cash flow issue, invoice factoring.  provides you with an advance against the total of an outstanding invoice, giving you a lump sum in a matter of days. (If not faster in some instances.) 

By helping you pick the financing that fits your needs, a good cash flow forecast can even save you money. By assessing where your financing gaps are, you only borrow what you need. This helps you save money in the long term by not paying interest on amounts you don’t need or avoiding penalties from missed payments or misaligned products.

Read More: Cash Flow Forecasting — What You Need to Know

How cash flow forecasting affects the application process

Your cash flow forecast will also be of interest to your lending partner. For them, financing is all about risk. The more proof you have that you can afford to repay debts, the less risky your company appears. Good cash flow management signals to lenders that you’re able to assume the costs of repayment. This, in turn, demonstrates that your future financials can withstand this extra financial burden throughout the payback period.

Lenders also look at your 5 C’s of Credit when evaluating your application, and your cash flow forecast can go a long way in making these criteria more appealing. The 5 C’s of Credit are:

  1. Character: Your personal and professional credit history (past and present debts), as well as the personal profiles of you and your co-signers (your professional history, accomplishments, or other testaments as to why you’re creditworthy).
  2. Capacity: Your company’s ability to pay back the amount of the loan in question. Lenders want to see if your cash flow can support the additional debt and expenses associated with your financing.
  3. Capital: The amount of money that business owners have invested in their own company. Lenders like to see that entrepreneurs have put some skin in the game themselves before they provide you with cash.
  4. Collateral: What businesses can offer their lender in the event that they’re no longer able to pay back their loan. Collateral can consist of liquid assets or business equipment.
  5. Conditions: How borrowers intend to use their loans. For example, whether they’re using the loan to pay for raw materials or a new marketing campaign.

Cash flow forecasts impact several of your company’s 5 C’s — particularly your capacity to pay back your loan on time and without complications. They also reflect the collateral you can provide and the conditions for which you’re seeking the loan in the first place.

Read our full article on the 5 C’s of Business Credit

What else lenders look for in a cash flow forecast

Cash flow forecasts are akin to going under the hood of your company’s financial vehicle. They let lenders take a look at to review your one-off and recurring expenses, your income sources, your expectations for future financial operations, and whether or not your forecasting model is correct. In particular, lenders look at your cash flow forecast for:

  1. Future sales: Banks want to know about recurring revenue sources, as this demonstrates that your company is sustainable over time.
  2. Invoice payment timing: The timing of your accounts receivables and payables matters to lenders too, as it influences your company’s cash flow on an ongoing basis.
  3. Business costs: Whether or not your company has overhead issues also goes a long way in the loan decision-making process. Banks want to see how you’re spending your money, and whether or not your expenses are sustainable.
  4. Operational health: Cash flow forecasts demonstrate your company’s operating health. Banks want to know if you’re operating with a baseline level of success before making an investment. After all, few people want to lend to folks who can’t pay them back.
  5. Historical performance: As the old saying goes, history repeats itself. Your previous financial performance provides a benchmark for future activity. It also reflects whether or not you experience cyclical downturns or periods of financial instability.

There are other means by which lenders can get details on the aforementioned points. However, cash flow forecasts collate them into one document, which makes it easier to assess whether or not your business is as creditworthy as it appears in your application.

How to create a cash flow forecast

The best way to prepare an accurate cash flow forecast to maximize business funding is through PayPie’s cash flow forecasting tool. Our proprietary risk score, built into your forecast, also gives you insight into what your company’s credit looks like in near-real-time.

cash flow management main dashboard

Just create your PayPie account and connect your business. QuickBooks Online users can start right now. And the entire process doesn’t cost a single dime.

PayPie integrates with QuickBooks Online. Other collaborations are in the works. 

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

Images via Pexels and the PayPie Cash Flow Dashboard. 

Cash Flow Budget: Why it Matters for Good Business

Cash Flow Budget Main Image

In the words of Ralph Waldo Emerson, “Money often costs too much.” At PayPie, we heartily agree: Cash flow is the best indicator of your business’s financial health and if you don’t watch it carefully, the price can be steep.

Having as many insights as possible about how cash is going into and out of your business is crucial to understanding both the short- and long-term odds of survival. Putting together a cash flow budget it part of that.

A cash flow budget — or cash budget, for short — is different than a cash flow statement. It’s luckily simpler to put together, but just as necessary to understand your runway.

A cash flow budget explained

At its simplest, a cash budget lets a business understand whether or not it has enough net working capital to operate during a fixed window of time. Because you’re assessing liquidity for operational solvency, businesses generally perform cash flow budgeting every month. (Quarterly can work, too, though PayPie recommends sticking with monthly assessments to get the best data you can.)

To calculate your cash flow budget, you’ll look at your estimated cash inflows and outflows over the period of your choosing. That’ll include what you forecast you’ll spend on products or services and operating expenses, plus what you expect to make (and actually get paid out).

If your sources of cash exceed your uses, you’ll have a positive cash position. Vice versa, you’ll be in a negative cash position. You’ll also be able to see your estimated cash position at the beginning of your next cash flow budget period (depending on how often you keep them).

cash flow budget piggy bank

Cash flow budget ≠ cash flow statement

A cash flow budget might sound similar to a cash flow statement, but it’s definitely not. That’s an entirely separate document.

Your cash flow statement is an essential accounting document that you’ll need to keep alongside your cash budget. Part of the trifecta of most important financial statements, your cash flow statement — or statement of cash flows — is a more complex, formal document. It also pulls from your other financial statements, so if there’s a substantial change to your income statement, it’ll affect your cash flow statement as well.

As cash flow is the lifeblood of your business, you need to keep your cash flow statement as current as possible. A best practice is to update it each month before running your cash flow forecast. This way you can ensure that the data in your forecast is up to date.

More Tips: How to Read a Cash Flow Statement

Where your cash flow budget fits into the big picture

Your cash budget gives you a sense of your short-term operations. Your cash flow statement, on the other hand, is taking a look at your cash solvency over a longer duration. You can think of your cash budget as a management tool where you’re watching your costs, supplementing the overarching formal statement of cash flows.

Only together will your company have the insights it needs to make the right decisions about your cash flow and the future of your business.

Read More: A Real-World Cash Flow Story 

Do you need to make adjustments to your overall budgets?

That’s what cash flow budgeting can tell you when used in tandem with your cash flow statement. (Plus, adding cash flow forecasting to the mix gives you just one more piece of the picture, helping you track patterns in your data, like whether your accounts receivable is out of sync with your accounts payable, for instance.)

Practical ways to use a cash flow budget

Let’s say you run a company that manufactures and sells contemporary rugs. You’d use your cash flow documents — statement, budget, and forecast — to keep track of your operations.

  • You cash flow statement will serve as your foundation to show how many synthetic rugs you’ve sold, how much it cost you to make them, and during which period of time this cash came in or went out.
  • Your cash flow forecast will be your resource to evaluate and determine your cash trends, like when your margins are synthetic rugs are highest.
  • Your cash flow budget will help you manage short-term costs, especially within operations.

These documents will all inform each other. For instance, if you understand your margins from your cash flow forecast, you’ll get insight into the things that affect your cost of goods within your cash budget. Using them together, you’ll be able to optimize your cash flow.

How to create a cash budget

In order to put together a thorough cash flow budget, you’ll need to gather information on your projected inflows and outflows. Most simply, you’ll need a topline on your receivables and expenditures to calculate your net cash flow.

Here’s a basic cash flow budget template to get you started:

Part I: Cash outflows

  • Operational
    • Supplies
    • Marketing and sales
    • Taxes
    • Payroll
    • Rent or property payments
    • Misc fixed expenses
    • Accounts payable
  • Investment
    • Asset purchases
  • Financing
    • Loan payments
    • Other short-term or installment payments
  • Misc expenditures

Part II: Cash Inflows

  • Beginning cash balance
    • Accounts receivable
  • Business revenues 
    • Asset sales
  • Misc income
    • Claims
    • Rebates
    • Shareholder equity (FYI: this only applies if you’re incorporated with shareholders)

Part I —Part II = Net Cash Flow

Note that this is only an example. Due to the nature of your business, you might be adding many more — or fewer — line items. But the point here is to show the kind of elements that comprise your cash inflows and outflows. This number will also give you a starting point for your next month.

What’s also important to note is how net terms (also known as trade credit) can have a significant impact on your cash flow budgeting. Since your cash budget is measuring the short-term, and you might be either extending or paying on net terms of 30, 60, 90, or even 120 days, your cash flow can be significantly affected when these invoices are either paid or due, respectively. Especially if they’re broken up into deposits and collection on delivery (COD).

That’s one of the reasons keeping a monthly cash flow forecast, along with a longer-view cash flow statement, is necessary.

More Tips: Common Invoice Payment Terms 

How your business can use a cash flow budget

A cash flow budget is yet another financial document. So, if you have your stuff together, you don’t need to do it, right? Well, if you 100% want to stay in business, we’d really, really strongly advise that you do.

More seriously, though, without detailed insights about your cash flow management, you won’t be able to know what changes to make to your cost centers in order to keep the doors open. The more data you have about your financial position, the better. And that’s what a cash flow budget provides you.

Make the right adjustments

For instance, say you go along with PayPie’s advice to do your cash flow forecasting for the month. (Good idea.)

Perhaps, after running the numbers, you end up with a projecting a negative cash position. That’s not great news, no. But it does empower you to do what you need to do to obtain the capital you need. Maybe that’s free up capital tied up in trade credit with invoice factoring or apply for a business line of credit.

Short-term cash flow budgeting also allows you to understand your cost centers more intimately. As a business owners working to better manage your net cash flow, you’ll be able to focus in on where you’re spending monthly and why. Is your cost of goods sold (COGS) rising faster than expected because of market conditions, or something else? Do you maybe have a larger buffer than your expected to be able to bring on extra help?

Read More: How Cash Flow Consulting Helps Businesses 

Short-term cash projections help with a long-term strategy

Smart entrepreneurs will also create cash flow budgets for several months in advance using projections for future cash flow. This’ll let you be prepared for any future issues — and spot cash flow gaps. The sooner you can see where your business might come up short, the faster you can act to mitigate issues so they never arise.

In order to have the most detailed data you can to create highly detailed cash budgets, you’ll need cash flow forecasting tools available. PayPie provides the insights entrepreneurs need to prepare themselves for every cash flow scenario, and take out the guesswork involved in making ends meet.

cash flow management main dashboard

Signing up for PayPie is easy. Just create your free account, connect your business and run your forecast. 

Paypie is currently compatible with QuickBooks online, and more integrations are in the works. 

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. 

Small Business Cash Flow Statistics: The List to End All Lists

small business cash flow statistics

Cash is king. Cash flow is one of the top small business killers. Money makes the world go round. You’ve heard it all. But what are the current cash flow statistics and trends to back this up?

At PayPie, we know how much foresight matters to your cash flow and overall financial health. Having the right facts at hand makes you better informed and prepared, regardless of the situation. For all the fact hounds out there, here’s our end-all-be-all list of small business cash flow statistics and trends:

There are more small businesses than any other kind of business

When you look at the numbers, it’s not just size, it’s quantity. Most businesses — anywhere in the world — are small to medium-sized enterprises (SMEs).

  • SMEs represent 99.9% of all US businesses.
  • 97.9% of all Canadian businesses are SMEs.
  • SMEs also represent 99% of all businesses worldwide.

Small business cash flow statistics and facts

If your SME struggles with cash flow, you’re not alone. Cash flow is a major concern. But it doesn’t have to be the enemy. This is why we’re committed to providing the knowledge and solutions you need to take control.

  • SMEs live and die by their operational cash flow.
  • Small businesses of all sizes consider cash flow one of their top 5 challenges.
  • Among failed SMEs, 60% cited cash flow as a cause.
  • For every $1 lent to small businesses, sales of these borrowers increased by $2.31.
  • 10 of the best businesses for cash flow include franchises, finance and insurance, health care and social assistance, home-based businesses, niche restaurants, real estate rental and leasing, retainer-based professional businesses, regulated industries, software as a service (SaaS) and service-based industries.

Read More: How to Read a Cash Flow Statement

Benchmark reports on small business cash flow

Because cash flow is so crucial to SMEs, it’s the subject of industry research and studies. The following are some of the most recent reports containing small business cash flow statistics. Thank you to all the organizations who put these together. Research is hard work and it’s even more difficult to do it well.

2017 C2F0 Working Capital Outlook Survey
(This SCORE article also summarizes the survey.)

Three-quarters of SMEs need more cash:

  • 37% of U.S. SMEs said their need for liquidity increased significantly.
  • 34% said it increased slightly.

How SMEs would use additional cash flow:

  • 33% would purchase more inventory or equipment.
  • 28% would expand operations, such as exporting to new markets or opening new locations.
  • 16% would use it to meet current obligations.
  • 10% would invest in employees through hiring, wages and benefits.
  • 9% would put the funds into R&D.
  • 4% would create contingency plans to deal with unexpected events.

SMEs and access to funding:

  • A majority said that access to traditional and alternative funding was easier.
  • There was a 40% increase in the number of SMEs using business financing.
  • 30% of SMEs feel that high interest rates keep them from using various forms of financing.
  • Alternative sources of funding, like invoice factoring and other online options, will be critical to meeting the needs of SMEs.
    • Globally, there’s an unmet credit need of $2.1 – 2.5 trillion.
    • By 2020, alternative lenders will have a 20.7% of the US small business lending market.

2016 JPMorgan Chase Report
(Based on info from 600,000 SMEs.)

  • Most SMEs only have enough cash flow to cover 27 days of expenses.
  • The top quarter of SMEs only has two months of reserves.
  • As a median, SMEs have $374 in average daily cash outflows and $381 average daily cash inflows of $381.
    • While this varies by industry, the median shows only a $7 difference between inflows and outflows. (This is detailed further in the SCORE infographic included in this post.)
  • The average daily cash balance is $12,100.
  • Labor-intensive or low-wage industries have fewer cash buffer days than capital-intensive or high-wage industries.

2016 SCORE Infographic — Small Business, Credit, Capital and Cash Flow (References the JPMorgan Chase report, specifically the daily income averages.)

Cash flow, costs, the availability of credit and building revenue are all top challenges for SMEs.

It’s harder for SMEs to get approval for business financing:

  • 38% of businesses with revenue less than $5 million are approved for bank loans.
  • 70% of businesses with revenue between $5 and 100 million and are approved for bank loans.

Why SMEs are turned down for business funding:

  • 25% are due to poor earnings and cash flow.
  • 21% are due to the size of the business.
  • 19% are due to insufficient operating history (new businesses).
  • 18% are due to poor credit.

SMEs are better at credit management than larger firms:

  • On average, SMEs credit scores are 48 points higher.
  • SMEs are less likely to have revolving bank cards that are 90 days past due.

Smaller banks approve more loans for SMEs

  • 60% of businesses with revenue less than $100K are approved by small banks
  • 69% of businesses with revenue between $100K to $1M are approved by small banks
  • 88% of businesses with revenue between $1M and $10M are approved by small banks.
  • 96% of businesses with revenue greater than $10M are approved by small banks.

The All-Too-Frequently-Cited U.S. Bank Study

Seen this one? 82% of all businesses fail due to poor cash flow management or poor understanding of cash flow itself. At PayPie, we’re careful to reference this statistic because:

  • The source is a U.S. Bank study conducted by Jessie Hagen. While this statistic is cited like crazy, it’s difficult to find the original source. Some citations, such as the one above, date back to 2011.
  • Checking her LinkedIn profile, Jessie was the vice president of U.S. Bank’s small business division from 2001 to 2006. So, the report was likely created during those years. This source puts the date around 2005.
  • Finding consistent statistics on small business failure rates is an equal challenge. This post also goes into the confusion surrounding these numbers.

Read More: Cash Flow Basics and Key Concepts 

Late payments are a BIG problem for SMEs

Cash flow management is all about timing inflows against outflows. When customer payments are late, the cycle gets all out of whack. Unfortunately, this is all too common in the SME universe. The following studies explain why:

2017 C2F0 Working Capital Outlook Survey

  • 24% of SMEs say that their customers are often late paying their invoices.
  • 28% of SMEs worldwide struggle with late payment.

2017 Sage Report — The Domino Effect: The Impact of Late Payments

  • 1 out of 10 SME invoices is paid late.
  • Late payments to SMEs total nearly $3 trillion worldwide.
  • Over 30% of SMEs experience or expect to experience a direct negative impact from late payments.
  • 10% of late payments are written off as bad debt.
  • SME spend nearly 15 days a year chasing payment on outstanding invoices.

2015 Wasp Barcode Small Business Accounting Report

  • 51% of SMEs consider accounts receivable and collections a top business concern.

Words of the Wise: Our Favorite Cash Flow Quotations 

The facts on SME credit reports

The current system for evaluating an SME’s credit history doesn’t favor the businesses themselves. Business credit reports are generated by several different organizations and most business owners don’t even know where to start in terms of managing these reports.

SMEs suffer awareness issues:

Business credit reports are complicated: 

Why this matters:

  • SMEs who understand their credit score are 41% more likely to be approved for business financing.

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

The facts on SMEs and financial knowledge

Honestly, unless you earn an MBA, they don’t teach entrepreneurship in schools. Most business owners learn as they go and any gaps in knowledge aren’t a reflection of personal fault. No single person can know everything. (Ok, we all know that one guy…)

  • Nearly 1 in 5 business owners don’t have separate business and personal banking accounts.
  • Only 39% of SMEs consider themselves generally knowledgeable about accounting and finance.

The numbers that prove why SMEs trust their accountants

Thanks to cloud-based small business accounting software, the internet and the modern age, it’s now easier than ever for SMEs to work with an accountant.

Read More: 10 Reasons Accountants Should Offer Cash Flow Consulting

The statistics on better SME business funding and risk scoring

While some of the cash flow statistics in this post may seem downright daunting and depressing, there is genuine hope for the future. Alternative financing options, like online and asset-based lending, are growing and technology continues to advance the cause of SMEs.

Read More: How Cash Flow Consulting Helps Businesses

Make your numbers work for you

At PayPie, we believe that the financing barriers most SMEs face simply aren’t their fault. In fact, our company began from a conversation where a small business software user asked, “Why can’t my lender just look at the reports I have in my account?”

Applying for traditional business financing can be tedious. So, can managing cash flow. Until now. If you’re a QuickBooks Online user, like roughly millions of other SMEs around the world, you can connect your QBO to your PayPie account and start analyzing your cash flow today.

Your interactive report, filled with insightful charts and graphs, will also contain a proprietary risk score derived from the same near-real-time data. It lets you know where you stand right now, instead of where you stood three months ago.

cash flow management main dashboard

As soon as it’s available, our invoice factoring will let you access a global marketplace of lenders in order to turn outstanding invoices into accessible funding.

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. 

12 Thought-Provoking Cash Flow Quotes and Expressions

cash flow quotes success

Few financial vital signs are as important as cash flow. Some of the best minds in business (and, surprisingly, hip-hop) have coined cash flow quotes musing about the keeping an eye on money coming in and going out of a business.

The first modern mention of cash flow dates back to 1863 in the United States and was the first accounting of cash receipts and disbursements of its kind. Since then, business magnates and people from all walks of life have opined on the value of cash flow. The following is a list of some of the best cash flow quotes and sayings.

“Revenue is vanity, profit is sanity, but cash is king.”
Unknown 

The origin of the mythical “cash is king” is unknown. The common consensus is that former Volvo CEO Pehr G. Gyllenhammar first used the expression in 1988 while discussing the global stock market crash of 1987. During that time, companies with ample cash reserves weathered the markets better than those who had poor cash management.

The expanded maxim’s message is clear and concise. Your company’s revenue figures are great to flaunt, but they don’t ultimately mean much if your cash flow is out of whack. Profit offers peace of mind, surely, but it doesn’t indicate that your business financials are sound. Only stable, reliable cash flow can truly demonstrate success.

Read More: The Difference Between Profit and Cash Flow

“A picture’s worth a thousand words.”
—Unknown

This is also a quote with a disputed origin. But, what’s undebatable is how visualizing your cash flow with a tool, like our cash flow forecasting and risk assessment, helps you see your cash flow in an entirely new light. Humankind was not created to manage by spreadsheet alone. In fact, most studies prove that people really are visual learners.

“Money is a terrible master but an excellent servant.”
—P.T. Barnum, founder, Barnum & Bailey Circus, showman and businessman

P.T. Barnum was never afraid to approach the elephant in the room—both literally and metaphorically. Barnum is famous for the circus which bears his name, but he was also a newspaper publisher and world-class huckster. His exploits made him a wealthy man, with an estimated net worth of $8.5 million. Barnum also authored several books, including The Art of Money-Getting, which remains one of the most on-the-nose book titles ever used.

But for all of Barnum’s escapades, the man knew how to bring in cash. He also knew that cash is best used as a tool to fuel growth and new business, rather than the end goal alone. Cash flow operates in much the same way for today’s entrepreneurs. You should rely on cash flow to serve your needs, but never let it be the sole ringmaster controlling your fortune.

cash flow quotes box

Read More: The Facts on Cash Flow Forecasting

“Never take your eyes off the cash flow because it’s the lifeblood of business.”
—Sir Richard Branson, business magnate, investor, author and philanthropist

Richard Branson knew he wanted to be an entrepreneur from an early age. He began his first business, a mail-order record business, at the age of 17. He then went on to open the Virgin Records chain in 1972, an airline in 1984, a train system in 1993, and a space tourism business in 2004. If anyone knows how to juggle business development with cash flow analysis, it’s likely the man who started off with a magazine and may one day end up in outer space.

Branson’s aspirations likely would not have taken off were it not for a steadfast control of his companies’ cash flow. New business may come and go, but cash flow dictates whether or not you’ll be in operation long enough to see them come to fruition. Companies cannot thrive, let alone exist, without positive cash flow.

Like Numbers Too? The End-All-Be-All-List of Cash Flow Statistics 

“Cash rules everything around me. C.R.E.A.M. get the money— dollar dollar bill, yo.”
—Wu-Tang Clan

 The Wu-Tang Clan are perhaps known more for their genre-defining art than their financial acumen. But C.R.E.A.M. remains as salient today as it did when the song (and acronym) first dropped on Enter the Wu-Tang (36 Chambers) in 1994. To paraphrase band leader RZA, without positive cash flow, “You [can’t] punch your way out of a wet paper bag with a pair of scissors in your hand.”

Much like the adage that says cash is king, cash should rule everything around your business. Revenue’s important, and so is a solid business model. But everything comes back to cash flow. Protect your neck by keeping an eye on your cash coming in and your money going out.

“If I had to run a company on three measures, those measures would be customer satisfaction, employee satisfaction, and cash flow.”
—Jack Welch, Former General Electric CEO, author and chemical engineer

Jack Welch is one of the wisest business leaders of his generation. He reorganized and rebuilt General Electric (GE) in what became one of the strongest corporate turnarounds in history. Transforming an aging manufacturing giant into a business behemoth, Welch’s management style pushed employees to perform at their best. His vision for GE also strove to increase the company’s market share.

But cash flow sits alongside these two tenets of Welch’s business philosophy, signifying just how important it is to keep your company’s capital in good shape. Without happy customers and employees, you can’t attract and retain people to fuel your business. And without cash, you won’t have a business to fuel in the first place.

“We were always focused on our profit and loss statement. But cash flow was not a regularly discussed topic. It was as if we were driving along, watching only the speedometer, when in fact we were running out of gas.”
—Michael Dell, founder and CEO, Dell Technologies

In 1984, Michael Dell started his technology company by building and selling personal computers from his dorm room. He went on to win business by undercutting his competition, mostly because he didn’t have the overhead costs that come with retail operations. Dell started his business by focusing on profit and loss statements, avoiding consumer-facing retail due to low profit margins.

What Dell had to learn about business was that cash flow is the real barometer of a company’s overall health and viability—not profit. Low profit-margin companies can thrive so long as their overhead remains minimal and their sales volume high. Focusing on profits and losses can come at the expense of cash flow management, which means you might find yourself running on empty sooner than you think.

Learn More: 5 Stories Your Financial Statements Tell

“Money often costs too much.”
—Ralph Waldo Emerson, essayist, lecturer and philosopher

 Were Emerson alive today, he’d likely have one of the best Twitter accounts out there. The transcendentalist thinker coined some of the pithiest phrases of his time and wrote extensive treatises on the human condition just as compellingly.

Emerson is also quoted as stating, “Money is of no value; it cannot spend itself. All depends on the skill of the spender.” Both of these insights are applicable to the importance of cash flow. It’s better to monitor your cash flow and borrow wisely. This allows you to use your company’s capital in a skilled, deliberate manner.

“Entrepreneurs believe that profit is what matters most in a new enterprise. But profit is secondary. Cash flow matters most.”
—Peter Drucker, management consultant, educator and author 

New entrepreneurs may see profit as a marker of a successful business, but cash flow is what keeps the lights on. This is a more accurate marker of your company’s success in its early stages than the amount of money you bring in, as profit only tells one part of the story.

It’s difficult to keep cash flow in mind when you’re starting a new venture. The demand to generate revenue can overshadow the necessities of money management. But the latter is more important than the former, lest your company spend more than it takes in.

“The more a business owner knows about their cash flow, they more empowered they become.”
—Nick Chandi, PayPie CEO

 Our very own CEO, Nick Chandi, nicely sums up the importance of knowing your cash flow inside and out. Small and medium-sized enterprises (SMEs) have to pay close attention to where, when, why and how cash moves through their business. Cash flow concerns can get eclipsed by the other daily issues that require an entrepreneur’s attention, however.

In order to look ahead, you have to see where you’ve been. Cash flow forecasting lets you look at the factors affecting your cash flow, like accounts receivable and payable, so that you can see patterns and anticipate or prevent gaps. A risk score, contained within the forecast, also provides a key indicator of financial health and the ability to procure businesses financing when needed.

More Tips: How to Read a Cash Flow Statement

“There is really only one way to address cash flow crunches, and it’s planning so you can prevent them in advance.”
—Elaine Pofeldt, writer, editor, and author of The Million-Dollar, One Person Business

Pofeldt hits upon a crucial component of financial success: Preparation. Your company may be raking in revenue today, but face a financial downturn tomorrow. The best way to safeguard your business against the ebbs and flows of commerce is by planning ahead and managing cash flow before crises arise.

The first step toward preparation is management. The more you manage cash flow today, the better you can understand your needs in the future. It’s better to invest time and effort now than to pay for inattentiveness in dollars and cents down the line.

“The fact is that one of the earliest lessons I learned in business was that balance sheets and income statements are fiction, cash flow is reality.”
Chris Chocola, American businessman and former politician

There’s any number of metrics out there that business owners can use to benchmark the success of their venture. Some are better than others. Income statements and balance sheets often tell an incomplete picture at best, and an inaccurate one at worst. It’s easier to spin these figures in a positive manner, whereas cash flow statements provide an unvarnished glimpse into your company’s overall health.

Cash flow, therefore, is the best way to track your company’s performance and viability. If you are able to keep a close watch on cash flow, you can then project whether your income is sustainable for growth and if your balance sheets accurately account for your assets and liabilities.

No matter which of these cash flow quotes and sayings most resonates with you, the most important takeaway is the virtue of maintaining a clear and accurate picture of your company’s financial decisions.

PayPie helps you keep track of your business’s current cash flow and future projections will deep insights. And with that information, you can make more informed decisions about your company’s future.

Signing up is simple. PayPie integrates directly with QuickBooks Online and you can connect your account with just one click. (Other integrations are in development.) Remember, “Actions speak louder than words.”

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

Images via Pexels.

Recurring Revenue: 5 Proven Models

Recurring Revenue

Business is inherently unpredictable. You’ll never be able to control whether the market will continue to desire your product or service. But, you can hedge against a few things, like a less lumpy cash flow. As long as you are making money, you can set up recurring revenue models to continue doing so.

Recurring revenue provides stability through dependable income that flows into a business on a consistent basis. Along with regular cash flow forecasting, like the kind offered by PayPie, recurring revenue helps you build long-term financial health and lay the groundwork for future growth.

What is recurring revenue?

Recurring revenue is very much what it sounds like — earned money that flows into your company at predictable intervals. Most businesses are set up to be one-off transactions — purchase the item you need, then go on your merry way.

But, one-off transactions aren’t enough to sustain most businesses, especially when cash flow issues are the number one reason small businesses fail. You can forecast your cash flow to predict inflows — but if that money doesn’t come in, you could experience a cash flow crisis. Recurring revenue streams help prevent this sort of misfortune.

More Tips: How to Read a Cash Flow Statement

Why recurring revenue is important

You’ll always be able to pull the strings on your company’s variable costs, but the same is not always true with your fixed expenses. At the end of the day, as much as you pare back your operating costs, running a business still takes money. Which means you have to make money to stay in business.

A recurring revenue stream lets you better estimate your cash flow on a regular basis. Will you be able to cover those minimum fixed costs? While there’s always the chance the unexpected can happen, the expected, via recurring revenue, is much better. 

Other benefits of establishing and measuring recurring revenue:

Predictable income is perhaps the most obvious benefit to building recurring revenue. But, in generating and monitoring recurring revenue, there are other insights you can build upon including:

  • Average revenue per customer (ARPU): By having a strong sense of what your customers will cost you each month, you’ll find intuitive ways to increase your profit margins. For instance, you may be able to produce consumer goods at a larger scale or lower your cost of goods (COGS). Or, offer upgrades, add-ons, and other modulations to earn more ARPU.
  • Customer knowledge: You learn a lot about your customers’ likes and dislikes from your customer retention rate. The more you know about your customers, the stronger both your brand and business model become.
  • Retention vs. acquisition: Customer acquisition cost (CAC) is a challenge for many businesses. You’ll still have to contend with getting your CAC as low as possible, but when consumers opt into a subscription, you won’t have to worry about getting them back for another purchase. Instead, you’ll focus on retention, which is inherently easier since they’ve already expressed a desire for what you offer.

Read More: 7 Ways to Boost Cash Flow

Every penny counts

5  types of recurring revenue business models 

Different types of businesses require different types of business models. Luckily, no matter whether you’re a manufacturer or retailer, you should be able to find some way to establish recurring revenue streams. Diversifying to bring in a little extra money on a regular basis? Well, that’s just good business. Here are five ways to do just that:

1. Subscriptions or memberships

Subscriptions and membership-based programs, like the ones below, work well to create dependable recurring revenue. Businesses that use subscriptions and memberships rely on income from these fees as recurring revenue. There’s also a good likelihood that you participate in one yourself.

  • Software as a Service (Saas): Companies including Atlassian (Trello, Confluence, JIRA, BitBucket, and more), Slack, ZenDesk, Shopify, DocuSign, and Gusto bill teams monthly.
  • Subscription boxes: Subscription boxes are popular for consumer goods, including Rockets of Awesome for kids’ clothing, BullyMake for dog toys, BirchBox for beauty products, Sun Basket for healthy meal kits, and Dirty Lemon for detox drinks.
  • Content as a Service (CaaS): Many B2C services you’re used to using in your everyday life employ a variant of the SaaS model, including Netflix, Hulu, and ESPN+. This also goes for apps, like Drops for learning language, ClassPass for fitness, or Spotify for music.

Subscription-based businesses are a high-potential area of recurring revenue. Over the last five years, the subscription-based e-commerce businesses have grown more than 100%. And, since 15% of online shoppers have signed up for some kind of recurring revenue-based product — with subscription boxes as the largest category — there’s lots of growth to come.

2. Auto-ship

As a slight variant on subscription services, some e-commerce businesses choose to encourage customers to set up a recurring shipment at checkout. Many even incentivize longer-term purchases with a discount.

The most common auto-ship setup you might be familiar with — and may even use — is Amazon’s “Subscribe and Save” feature. With this feature, Amazon offers a fixed percentage, generally between a 5 to 20% discount, off certain products for setting up auto-ship. It’s a two-way win, both lauded as a consumer hack to save money, and a smart way to generate recurring revenue.

But you don’t have to be as big as Amazon to afford and implement auto-ship.

  • Pet e-tailer Chewy lets its customers set up a custom Autoship package with 5% flat discounted essentials. They also let customers choose their shipping windows or ship on demand if they need the package sooner.
  • Custom hair care company Function of Beauty offers customers the option to subscribe to their formula. It automatically ships every one, two, or three months as desired.

3. Consumable

The famous example for this kind of recurring revenue stream is Gillette razors. (You might know it as razor-and-blade.) The premise is so simple but so effective.

A company sells a core, durable good once, then creates a recurring revenue stream with proprietary consumables that must be continually purchased to use them. The economics here are favorable for businesses, because the “blade,” so to speak, is often sold at a much higher margin.

In fact, many companies often sell away the “razor” at little-to-no markup. Many major companies — Procter & Gamble, owner of Gillette, included — often give “the razor” away to bring customers into the recurring revenue ecosystem immediately.

There are several other upsides to this model:

  • Keurig Green Mountain, which makes the Keurig coffee brewers, earns the majority of their revenue on the recurring purchases of its single-serve K-Cups. Its market share has exploded: 29% as of January 2017. Such dominance has allowed the company to create an additional revenue stream. Keurig licenses its proprietary technology so other consumer packaged goods (CPG) companies can sell their beverages in K-Cups, too. (If only they’d offer their “razor” for free.)
  • Startup toothbrush company Goby combines the consumable and auto-ship models. Goby sells an electric toothbrush kit once, then makes its recurring revenue on its brush heads — the only other product it sells. Customers receive $15 off the product itself when they opt into an auto-ship option at checkout. (Hello, hybrid solution.) 

4.   Contracts and retainers

Even if you create an infrastructure for recurring revenue, there’s still a fair bit of crossing your fingers and hoping your customers will continue to spend. Although consumers favor these less, contracts are a way to build in a little peace of mind and a lot of value.

There are many ways to build a contract or retainer into your business model. And many businesses do. They’re used at well-known tech and telecom companies and negotiated privately between restaurants and their suppliers, for instance. Even a rental agreement for a property is a form of contract wherein a landlord receives recurring revenue from a tenant monthly.

Retainer models are another common form for many professional service companies. With retainers, the professional and client agree on a set number of hours and scope of work for a project each week or month. Then, the agency, consultancy, or group of specialists bills a flat-fee. There’s a lot of flexibility in this approach, which can be tailored to work for something as creative as a copywriting agency or as traditional as a law office.

You can choose to structure a contract or retainer with a monthly fee, of course. Or, alternately, you might want to consider a yearly bill to create a larger lump sum of recurring revenue. Many subscription-based companies offer an alternative to monthly subscriptions with a small discount if companies pay a year up front. It’s a good deal for everyone, especially if your customer knows they rely on your service; and you, of course, get your cash.

If contracts and retainers sound like viable options for your business, there are benefits from the behavioral economics standpoint, too. Because humans are inherently loss-averse and hate to see our money go away, we experience the “pain of paying.” If you can get your customers to agree to pay you once when it works for them and be done, they’re more likely to view the investment as a good, and painless, one.

5. Loyalty and habit

The most desirable kind of recurring revenue is the one you don’t have to chase down at all. It just happens because your customers are that loyal. As you’d expect, it takes a while to get here — and many businesses never do.

Some of these might sound familiar:

  • There are those who don’t start the day without a light-and-sweet iced coffee from Dunkin’ Donuts.
  • Others who pack their workout clothes to go to SoulCycle, no matter the city.
  • Brand evangelists who religiously buy Apple MacBooks and Apple-branded peripherals.

This phenomenon isn’t just for consumer brands. Think, for instance, of Atlassian, whom we mentioned in the first example. Many companies whose engineering teams loyally use JIRA decide to put the rest of their teams on Trello, since they’re fond of Atlassian’s products (and already in their ecosystem, anyway).

Recurring revenue from habitual behavior is tenuous — your customer could, say, move or encounter a product sample that changes her mind. Regardless, branding and brand loyalty is immensely powerful and could generate consistent returns if executed well.

How recurring revenue affects cash flow

If you’re able to establish a recurring revenue stream for your company, that’s a big win. Recurring income is a huge step in creating stable cash flow.

Because, yes — this all comes back to cash flow.

Use cash flow forecasting to build stronger recurring income

Recurring revenue makes sure your business can keep its lights on. As your customers pay a consistent fee every month (or year, or whatever you’ve established), you introduce a level of predictability into your company financials. You’re able to build out more accurate cash flow forecasts and drill down into whether or not you make certain choices with your business.

For instance, will you have enough money each month to apply for business funding to speed along your growth? Or, at the complete opposite end of the spectrum, are you at risk for still not making ends meet? If the latter is the case, you’ll be able to quickly make changes to your business model, whether that’s bringing down your COGS, or maybe attempting to lower your CAC.

More Tips: The 10 Best Businesses for Cash Flow

4 ways to ensure  your recurring revenue recurs 

As much as a recurring income sets you up for success, you have to nurture it like any other kind of financial variable to keep it sustainable.

1. Keep customer payment information up to date. Credit cards expire or get replaced. PayPal and Venmo accounts get unlinked. In order for you to keep receiving recurring revenue, make sure your customer payments are valid and consistently coming through.

2. Stay in front of renewals. Don’t let subscriptions, auto-renewals, memberships, or contracts lapse. If a customer figures out they can live without your product or service for any amount of time, you’re far more likely to lose a customer. (Remember, the pain of payment is strong!) If your customers aren’t interested in renewing or don’t have the means to, work with them to provide incentives or custom payment packages. A little less revenue is better than none at all.

3. Watch your churn rate. Keep an eye on your subscription attrition, otherwise called your “churn rate.” If it’s high and climbing higher, and you’re not at minimum recouping your CAC, the alarm bells should be ringing. It’s time to change something. (Remember that your best sounding boards are your subscribers, both current and past.)

4. Monitor your cash flow diligently. Your cash flow is a window into the health of your business. Cash flow forecasting helps you monitor your recurring revenue. You’ll be able to predict whether you’re going to need to make changes and how you can improve your margins.

Having the best tools to understand your financials is paramount to getting the best information. Signing up for PayPie is easy. Just create your account then connect it to your QuickBooks Online account. Your near-real-time cash flow forecast will pull from your current financial data.

PayPie currently integrates into QuickBooks Online, more integrations are on the way.

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

5 Stories Your Financial Statements Tell

The stories your financial statements tell main image

For some entrepreneurs, putting together your financial statements can seem like busywork. You have a business to run, so can’t your accountant just whip up what you need and send it off wherever it needs to go? Theoretically, sure. But the most forward-looking business owners understand that doing the numbers isn’t just perfunctory.

That’s because your financial statements tell very specific stories about your business. What they say could have a big impact have on your company’s cash flow and future. But, it all depends on who’s looking, and, of course, the numbers themselves. (See what kind of stories unfold with PayPie’s cash flow forecasting.)

The first 3 chapters in your financial story

We’re not talking about just any financial information. We’re talking about three business financial statements very specifically — what we at PayPie (and most everyone else) look at as the accounting trifecta. Together, the income statement, balance sheet, and cash flow statement give the full picture of how your company is performing financially.

Income statement

If you’ve never heard the term “income statement” or “statement of income,” then you’ve probably heard “Profit & Loss” (or just “P&L”). Whichever term you know, they all mean the same thing.

Your income statement is the first massively important document in the trifecta. Briefly, it shows you whether or not your business is making a profit. It also reveals where you’re earning and where you’re spending — and, naturally, whether you’re spending more than you’re earning.

That alone can tell a story, but what’s especially notable about your P&L is that it tracks data over a specific period of time. Many business owners do them quarterly, and, at a minimum, yearly. Some even choose to draw up an income statement every month to be able to get a more consistent pulse on trends.

Learn more about income statements.

Balance sheet

Next up is your balance sheet. Like your income statement, this also has another name — the “statement of financial positioning.” It centers on a simple but telling equation to allow you to see your business’s net worth:

Assets = Liabilities + Equity.

In contrast to the P&L, your balance sheet looks at a specific moment in time. This is an important difference when you’re thinking about the stories that your accounting documentation tells, especially because circumstances change so rapidly in business. Due to accounts receivable and payable, among other factors, how your finances look on one given day can — and likely will — be very different compared to another. Even if it’s just a week later.

Learn more about balance sheets.

Cash flow statement

Rounding out the three, your cash flow statement. (And, our personal favorite at PayPie. Because, absolutely, we have a favorite financial statement.) Your cash flow statement — or “statement of cash flows” — shows the movement of cash into and out of your business. That includes your investments, operations, and any financing you have, too.

We mention cash flow last certainly not because it’s least. Far from it — in fact, most small businesses fizzle due to poor cash flow management and the subsequent lack of capital. Rather, it’s important to understand your P&L and balance sheet first because your cash flow statement ties directly into numbers that appear on both. It pulls from amounts on each. It also supplements them with additional insights.

Learn more about cash flow statements.

income statement and balance sheet in a financial report

What your financial statements reveal

Alone, your three financial statements certainly help you get a picture of how your business is doing. But it’s sort of like reading through a book without vowels. You can get through the story, but the words are incomplete. Plus, you won’t understand how the writer intended you to get through the book. You miss the insight into the language that having every last letter provides.

And there are a lot of stories hidden in your accounting documentation! You’ll want to make sure you understand what some of the most important big ones are saying about your company.

1. How well you budget your cash flow

Since cash flow is a big component of all three of your statements, you’d likely expect that you can gather a lot about your business’s cash flow when you look at all of them. What you can especially see? If you’re good with that cash. Which, as we mentioned before, is a major part of your company’s likelihood of survival.

Among the things those evaluating your cash position will be able to see are:

  • If you keep consistent — and right-sized — reserves.
  • If you have a tendency to hedge for emergencies or if you lean on financing often.
  • If you experience — and anticipate seasonal — fluctuation in revenues.
  • If and when you invest your cash, and how it affects your ability to pay your outstanding bills.
  • If you correctly manage your trade credit relationships.

2. How you manage your working capital

You have money to put into your business? That’s great news. Working capital is a huge sticking point for lots of small-to-medium enterprises (SMEs) who need access to more funds to initiate growth phases. Many businesses seek financing specifically for working capital, so it’s important to know if you’re using your own productively.

Your financial statements will reveal a lot, including:

  • If you’re keeping too much working capital on hand instead of investing it.
  • If, on the other hand, you’re investing too much and not keeping enough in reserves.
  • If your investments are incorrectly distributed to accelerate growth.
  • If you’ve put too many resources into one asset class versus another preventing maximum return on investment (ROI).

3. If you’re making the money you could — or should — be

Whether or not your business is maximizing its revenues can end up being a subjective conversation. There are a few things about the conversation, though, that aren’t a matter of opinion. Or, at a minimum, are less debatable than others.

Your statements will shed light on:

  • If your profit margins are too slim, and, relatedly if your cost of goods (COGS) is too high.
  • If your raw materials are increasing faster than you’re raising your prices or getting better terms with suppliers to sustain your margins.
  • If you’ve created a sustainable monthly recurring revenue (MRR) model.
  • If you’re pricing similarly to others in your sector — and making the same margins.
  • If your fixed and variable costs are on target or should be adjusted so you can net more profit.

4. Where you fall relative to industry peers

Benchmarking is an important concept in business. It’s helpful for you to know where you stand relative to others in your sector, and for outsiders evaluating your company to get an objective sense on how you’re doing. It also allows industry experts to be able to map you in your competitive landscape.

Your financial statements will help with benchmarking by:

  • If you’re growing are the same rate as comparable companies.
  • If current economic conditions are impacting you differently than peers.
  • If you’re allocating your capital in substantially different ways, or your operating costs are relatively significantly higher or lower.
  • If you’ll hit profitability before other major competitors.

5. If your capital asks are realistic

There comes a point in the life cycle of many SMEs when you’ll want to borrow money. It’s not a badge of shame — far from it, actually. Many entrepreneurs look for business financing when they want to accelerate their growth or seize an opportunity. And no amount of savvy cash flow management or diligent recordkeeping can see the future.

If you’re asking for a loan or an investment, your statements will be able to expand on:

  • If you have the cash flow to be able to pay back a lender in the case of a loan.
  • If you have consistent revenue history that makes you a good candidate for a term loan.
  • If you’re in a hyper-growth stage, or your business is on the decline.
  • If you already have a lot of outstanding debt.
  • If you don’t have enough equity left to offer.

Who interprets these stories (and why it matters)

You can learn a lot about your business from gigantic stacks of paperwork — but, other than the taxman, who cares? Many people, actually. (FYI, your income statement is of primary concern to the tax folks.) 

Lenders

When the time comes that you do want to borrow money, your financial statements matter. A lot. They’re the bulk of your loan application, and your underwriter will scrutinize them with a fine-toothed comb. (Don’t worry. They’re just doing their very reasonable but equally thorough jobs.)

That’s all to say that if your financial statements give off the wrong impression to a small business lender, you won’t get the money you might very much need. Or, with the terms you desire.

With business lending, your approval and subsequent terms are all about mitigating risk. A lender won’t allow you to borrow money if they don’t think you’ll pay it back. And, if you do get the green light, they still won’t give you favorable terms if your financials tell the story that you’re a high-risk borrower.

As they examine your accounting documents, especially your balance sheet and cash flow documentation, you want to make sure you present a super-responsible business owner. Liquidity is important here: Above all, they want to see they the story that you’re a safe bet to be able to pay back their money on time and in full.

The 5 C’s of Credit Explained 

Investors

The process of due diligence with an investor interested in your company is a short way to say “a deep dive into every financial document you’ve ever touched.” (They’ll talk to your friends and enemies, too.) As well they should! If someone is going to put their own cash into your business without any guaranteed return, you better have something better than solvent.

Of course, the quickest way for them to be able to tell if that’s the case is looking at your accounting trifecta. Investors are going to care quite a bit how you’re spending money, why you’re spending it, and your performance relative to your major competitors. If you have a good history with how your financial management, when you hire, etc, it’s a good chance that you’ll make their money work hard, too.

Investors want to see the story of your growth and your path to profitability. There are a lot of ways to illustrate that with meetings and pitch decks. You’ll have the chance to do that, but make sure you seize the opportunity to do so with your finances, too.

Potential business partners

There are lots of different types of business relationships: You could bring on a partner, acquire another company or sell your own, or simply establish a trade credit agreement with a major new supplier. Whatever you’re pursuing, all of these different arrangements are big deals. Don’t be surprised if the party you’re transacting with asks to open your books.

As good as your word is, it’s only as good as your last paid invoice or your last sale. And as much as you can find out from a business’s credit score — which is public information, by the way! Potential partners can only feel great about a major transaction, or even offering net terms when they feel satisfied that they know the story of your business.

Remember that the decisions you make with your company have implications for your partners. Poor cash flow management leads to a delinquent payment leads to turtles all the way down.

How to understand exactly what your financials say

You never want to be in a position where someone understands something about your business that you don’t. Especially anyone who’s in a position to change the trajectory of your future. So, you have to know all of the storylines that your financials contain — and know them first, and better, than anyone else.

The only way to see the whole picture is to collect all of the puzzle pieces. So, yes, that means all three statements. But it’s even more granular than that — you need all of the data and insights that power the numbers on each of those documents. Like we said before, more information empowers you, not less.

A cash flow forecast from PayPie adds a ton of depth into knowing how your business is doing. You’ll be able to understand the financial statement trifecta and make adjustments to get your company on the path it should be.  Signing up is easy — just connect your free PayPie account to your QuickBooks Online account. Your forecast is also free. Get started today! (If you don’t have QBO, hang tight. We’re working on other integrations as we speak).

cash flow management main dashboard

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 and Shutterstock. 

Business Credit Cards: How to Use Them

Best Business Credit Cards Canada

A business credit card is one of many ways to pay for goods and services. They offer plenty of advantages over cash or debit payments — including the ability to make large purchases without having to pay for them all at once. There’s the convenience factor of letting multiple employees make purchases with the same account. And there’s also the rewards and perks programs.

However, a small business credit card can also help you manage your company’s cash flow — especially if you use it as your company’s primary purchasing tool. 

When used correctly, credit cards can streamline your company’s spending practices. But, you’ll also need to track your cash flow with PayPie to make sure your credit cards really work for your business.

How to use a business credit card strategically

When used effectively, business credit cards can provide interest-free financing, travel rewards or cash back, other perks and discounts on commonly purchased goods. They’re an easy way to give employees purchasing power and they come with reporting and fraud controls.

Using your business credit card for interest-free financing

Getting a loan to pay for a much-needed purchase can be a lengthy task for most entrepreneurs. And that’s not even delving into interest rates, which can leave a bitter taste in your mouth when you need to access financing. Spending on the business credit card you open, there’s an opportunity to use promotional interest periods to finance large purchases — all without having to pay a dime in interest.

If you and your business have an exemplary history with credit, you may qualify for a 0% introductory APR business credit cards.

As long as your credit limit allows for it, take advantage of your introductory interest rate to make large purchases and pay them back over time without interest. You can also time your purchases to correspond with other perks, such as cash back or points, if your credit card includes them.

Note: Not every small business is eligible for 0% introductory APR cards and they’re not available in every country. (Sorry, Canada.) Thankfully, there are plenty of alternatives out there — particularly in the form of non-traditional short-term financing

Earning travel or cash back with your business credit card

One of the most common reason entrepreneurs open business credit cards is the ability to earn travel rewards or cash back.

When looking at these kinds of rewards programs, know exactly what benefits suit your needs. Determine how you’d maximize your points or cash back. Then, pick a card that will help you get the most out of your purchases.

Keep in mind that reward programs vary substantially from one credit card to the next. Some cards only work with specific airlines. Others offer additional miles for purchases from specific categories or retailers.

Do the math to make sure you know which reward program will benefit you the most. Literally, take a look at your current spending and see how the cash back or points would stack up.

The Best Business Credit Cards in the United States | The Best Business Credit Cards in Canada

Using your business credit card for perks and discounts

While travel and cash back are pretty popular, there are other kinds of reward programs. These include reward points that can be redeemed for any range of goods and services and discounts on common business purchases.

If these kinds of perks are for you, consider opening a credit card account at a store you frequent for your business. For instance, if you’re a landscaping contractor, a reward card from a home improvement or garden store makes sense. Many big-box retailers and online stores offer credit cards that reward you handsomely for making purchases with them through your store card.

Take note, though, that these cards do not offer perks for shopping at other stores. And, in some cases, offer lower cash back amounts than you’d find with a conventional small business credit card.

If you’re interested in reward points, also be sure to know where you can use them.

Having more than one business credit card

Having several business credit cards can be a mixed blessing. Your credit won’t get dinged for having several credit accounts (as long as you pay on time). But you could get penalized if you apply for more than one card at once.

That, and having several credit accounts defeats the purpose of managing cash flow through your business credit card, as you won’t have only one card through which purchases are made.

Using a business credit card for employee purchases

It’s impossible for a small business owner to be everywhere at once. This becomes painfully obvious when you’re tied up with other work, but are the only person with the authority to make a last-minute purchase. Business credit cards are a solution that empowers employees while maintaining a comprehensive view of where the company’s money is going.

Most business credit cards provide account holders with additional employee cards free of charge and all transactions are recorded on the main account contact so that you can accurately track expenses. In a worst-case scenario, account holders can also close accounts or deny purchases in order to prevent fraud and control costs.

Looking at business credit cards and cash flow

How To Use Business Credit Cards to Track Spending

Making your business credit card the default way to pay for purchases lets you use your credit card statement/expense tracking software to get a snapshot of your company’s spending over a set period of time.

When you use your business credit card to monitor spending, be diligent.

  • Your credit account has to be a direct substitute for a debit card, cash payments, or checks.
  • If you’re only making some of your purchases on your card, you’re not going to get a comprehensive picture of your spending activity.
  • Once you’ve consolidated your purchasing methods to your credit card account, make sure you’re using the card like you would cash.
  • Don’t spend more than you can afford to pay off during each billing statement, lest you incur hefty interest fees that you could have otherwise avoided.

Remember that business credit cards can impact personal credit

Your business credit card likely included a personal liability guarantee, which means that you’re personally responsible for paying any business credit card debt that the company itself cannot afford. For example, if your company goes bankrupt, you’re still personally liable to pay for any and all outstanding credit card fees. In this regard, there’s little that separates your professional debts from your personal obligations.

Read More: How Business Credit Cards Affect Personal Credit

Track, track, track

Add your credit card account details into your accounting software. Most credit card companies integrate with tools, like QuickBooks Desktop or QuickBooks Online, so that your statement information can be added to your overall financial data and reports.

In turn, when you connect your accounting software to a cash flow forecasting tool, your credit card information will be included in your expense analysis.

Beyond the business credit card

For all the perks of using a business credit card to track and conduct day-to-day spending, this method is only one of many strategies out there for keeping your company’s financials in order.

As credit cards are only one part of the spending picture, every entrepreneur should conduct regular cash flow forecasts in order to track all a business’ inflows and outflows. The sooner you track your cash flow, the easier it is to spot seasonal trends or potential emergencies before they occur.

While keeping tabs on your cash flow, you can also monitor your company’s credit risk. Knowing how creditworthy your company is before you begin applying for credit cards can also save you a ton of paperwork later on.

QuickBooks Online users can get started today. Simply sign up, connect your business and run your free report — which includes a proprietary risk score.

PayPie currently integrates only with QuickBooks Online. Additional integrations are in development. 

This information does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.

Images via Pexels. 

The 5 C’s of Credit Explained

5cs of credit chess pieces

Determining your company’s creditworthiness can feel like looking into a crystal ball. Although you might know some of the basics, it’s important to understand the 5 C’s of credit and how they make all the difference when you apply for business financing. 

The 5 C’s determine if your company has solid financials and is worthy of financing. They consist of your company’s character (credit history), capacity, capital, collateral, and the conditions of any loan offered. These key indicators help lenders get a rough sketch of whether your business is creditworthy — or if there is a risk that you won’t be able to repay your debts.

Before we go into explaining each component, we want to let you know that there are tools available to help you monitor cash flow and your overall risk profile. PayPie’s cash flow forecasting and risk assessment help you perform your own evaluation of your 5 C’s.

Breaking down the 5 C’s of credit

Lenders review mountains of credit applications every year, and statistics point toward this mountain growing even higher in the coming years. As a result, there’s just not enough time to go beyond the 5 C’s to evaluate your company’s credit risk.

The components represent the major determinants of your credit risk. Each element details how you manage finances, pay back lenders, and what would-be lenders can offer you. Here’s what each of the 5 C’s of credit means and how they impact your creditworthiness:

1. Character (credit history)

When lenders look into your company’s character, they’re determining your trustworthiness as a borrower. These factors consist of business experience, financial acumen, educational background, and a good track record of paying back any previous or existing debts. This is where your personal and professional accomplishments can make an impact. The more you’re able to convince lenders that you’ve got what it takes to build (and maintain) a successful business, the better your character appears.

Don’t be shy about your credentials if you want to ace your company’s character assessment. Mention any successful businesses you’ve started in the past, educational achievements, and prior instances where you’ve paid off loans on time. Include high-quality references from prior business associates and detail the professional experiences that you, your business partners, and employees have (especially if they’re brag-worthy).

2. Capacity

Capacity evaluates your company’s cash flow, and whether or not it has the capacity to repay the loan. Lenders don’t want to finance a business that may not have the income or resources to make repayment a sure thing. Lenders will look at the cash flow statements your company submitted as part of your loan application. They may also look at how long a company has been in business as a determinant of its financial health.

Read More: How Business Financing Options Affect Credit 

5cs of credit strategy coming together

3. Capital

Lenders like it when business owners invest some of their own money to get their company up and running. It signals that the founders are committed to their venture’s success. If you have not made a personal investment in your company (if you launched with external capital or startup funding, for example), you may not represent the kind of capital commitment most lenders would want to see.

4. Collateral

In addition to capital, lenders also want to know what assets you can use to secure your loan. Collateral can consist of liquid assets (your company’s cash), equipment, real estate, unpaid invoices, or other property. Secured business loans require collateral in exchange for approval, which allows your lender to seize your assets in the event that you can’t pay what you owe.

Not every loan requires collateral, however. Unsecured business loans give borrowers access to cash without offering their company’s assets in return. These loans are often easier to obtain than secured business loans, but require personal guarantees of repayment from applicants (meaning that you’re going to pay personally if your business can’t).

5. Conditions

Loan approval doesn’t only boil down to company success, personal accomplishments, character, or available collateral. It also depends on the purpose of your loan, as well as the overall stability of your company. These are also known as a loan’s conditions.

For example, the conditions of your loan appear more stable if you’re using it to buy the materials need to fulfill purchase orders. If you’re looking for general working capital to cover operating costs; however, your conditions may be less desirable. The logic behind these decisions has to do with whether or not your company’s underlying financials are strong.

Financing new business opportunities for a successful company is much different than financing operational costs for a business that might not be turning enough of a profit on its own. The former is less risky than the latter, which is more appealing for lenders.

Learn More: How Business Credit Cards Affect Personal Credit 

The bonus C: Communication

Communication is also a determining factor of whether or not you’re a good business partner. Conveying your company’s challenges and opportunities during the loan application process shows transparency and helps build trust between you and your lender.

The 5 C’s of credit and cash flow

Cash flow is the essential component that makes your company’s 5 C’s of credit shine. Capacity is all about measuring whether or not your company has enough liquidity to support a loan — making cash flow an essential part of the equation. 

Without positive cash flow, you’re going to have a tough time getting credit. The basis of good credit begins with solid financials — here’s why it pays to keep on top of your cash flow before you seek financing.

Managing cash flow helps you:

1. Demonstrate capital

As we’ve discussed earlier, capital is a major determinant for lenders when they review loan applications. You will need to provide as much information as possible about how much money your company has available, along with any other liquid assets. Cash flow management helps you keep track of your capital, which makes it easier for you to provide insights to your lender.

One thing to keep in mind is that there are lending options that don’t look at capital the same way that traditional term-loans or revolving lines of credit do. Asset-based lending, like invoice factoring and financing, let you use your outstanding invoices as collateral to access funds quickly and easily.

2. Keep debts organized

Lenders want to know how well you’ve handled debt in the past, as well as your capacity to repay new or existing loans. You can use cash flow management to track repayments, forecast future loan-related expenses, and monitor your own capacity to take on additional debt. You’ll be doing yourself a favor by staying organized. Your loan applications will also be all the more attractive as a result.

3. Create better revenue projections

Conditions are a crucial decider of creditworthiness. As such, your company’s revenue projections play a role in evaluating the risks and opportunities you might encounter in the future. The best way to anticipate future revenue is by monitoring your cash flow over time.

PayPie’s cash flow forecasting tool helps you better understand where your money is coming from, where it’s going, and what your company’s financials might look like down the road.

4. Answer questions during the application process

Loan application reviews are extensive, and borrowers need to be ready to answer questions about their business throughout the process. The best thing you can do is be prepared. Monitoring your cash flow can help answer common questions about your company’s current revenue, revenue projections, and operating finances. You’ll have answers if you monitor your cash flow on an ongoing basis, rather than piecing together financial information as questions arise.

The 5 C’s of credit may determine your company’s creditworthiness. You can set yourself up for success by keeping on top of your company’s cash flow.

The best way to begin is PayPie’s cash flow forecasting tool, which integrates seamlessly into your QuickBooks Online account (integrations with other bookkeeping platforms are coming soon).

Sign up, connect your business and run your free report! 

Best of all, the tool includes a proprietary risk score, which gives you further insights into your company’s attractiveness to lenders.

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.