Why is Cash Flow So Important in Small Business Loans?
Wherever your business is at the present time in terms of development and growth, financing is always an issue. Whether you’re a startup without the ability to cover all costs involved to merely “get off the ground,” an existing company looking to rapidly expand, or an established business looking to venture into new industries, you may be reviewing what possible financing options exist that can help you get to the next level.
Regardless of the position your small or medium-sized business may be in, cash flow is absolutely critical to obtaining funding. Below we’ll take a look at what cash flow entails, discuss why it’s such an important consideration in the eyes of lenders, and review what financing solutions National Credit Partners offers small and medium-sized businesses like yours while ensuring your immediate as well as long-term goals are properly considered.
What is Cash Flow?
Cash flow is a term used to describe the net balance of cash that is both moving into as well as out of a business at a specific period in time (essentially the cycle of funds from operations, investing, and financing). Cash flow can be identified as either positive or negative, and is based on the net cash generated to finance a business.
Cash flow may encompass:
- Debt
- Equity
- Dividend payments
Some examples of cash flow entries that should be included on a business’s report may include:
- Additions to property (plants, offices, etc.)
- Additions to equipment
- Capitalized software expenses
- Cash paid in mergers and acquisitions
- Purchases of marketable securities
- Proceeds from the sale of any assets
As we’ll discuss below, one key entry that is not included on a cash flow report is a business loan. Accordingly, businesses will often take out a loan to help demonstrate positive cash flow in an effort to secure additional financing.
Why is a Cash Flow Statement Important When Qualifying for a Loan?
Cash flow is a quick and effective way for a lender to assess a business’s ability to potentially repay a loan. A company’s cash flow statement should indicate that the business will bring in enough money to cover the costs of both the loan in question as well as any immediate and future financial obligations.
A business’s cash flow report will have a significant impact on a lender’s decision to either approve or deny your company’s loan. Lenders want to see that the business is profitable AND that there is positive cash flow.
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What Affects Cash Flow?
Cash flow can be determined or analyzed through a basic formula of adding and subtracting various line items. For example, if a lender looks at the following over a specific period of time, they can arrive at a business’s projected cash flow:
- Add all cash inflows from the issuing of debt or equity
- Add all cash outflows from stock repurchases, dividend payments, and repayment of debt
- Subtract the cash outflows from the inflows
Doing so will allow the lender to arrive at a figure representing the cash flow from financing activities for that specific time period.
Why is Cash Flow So Important to Lenders?
Cash flow offers lenders a necessary overview of your business’s financial capacity to pay back a loan, ensuring your business will be able to – regardless of the circumstances – generate enough money that will allow you to make payments on-time and not default on the agreement.
As your business grows, cash flow should exceed the amount needed to simply pay the company’s debts. In other words, your company should be using some of its cash flow (what’s known as the ‘excess’) to fund its expansion and future goals without having to borrow additional capital.
In addition to cash flow, which is one of the most important considerations made by a lender when reviewing a company’s financial condition after applying for a loan, other key factors may be included in the creditor’s ultimate decision.
The following ‘Five Cs of Lender Consideration’ may be applied in a total review of whether or not to issue a loan:
- Credit history
- Capital
- Collateral
- Cash flow (or capacity)
- Character
A lack of cash flow is one of the most common reasons small and medium-sized business loans are denied. Accordingly, ensuring your company is able to demonstrate positive cash flow can be critical to securing the financing you need for long-term success.
What Financing Activities Affect Cash Flow?
Cash flow is determined by examining the income statement and the balance sheet statement of a business. The balance sheet statement can include net income as well as working capital.
Changes in various line items can affect cash flow. Such line items may include:
- Sales
- Costs
- Inventory
- Accounts receivables
- Accounts payable
Does a Loan Affect a Small Business’s Cash Flow?
Borrowed money is not considered income generated by sale of either a company’s goods or services. This is true in spite of the fact that a loan and the payments made on it directly impact the amount of your business’s cash inflows and outflows. In other words, because a loan amount and the principal payments made towards it are not seen on your business’s income statement, it can help demonstrate positive cash flow and therefore allow for additional financing.
How Does a Loan Benefit or Help a Small Business’s Cash Flow?
When small or medium-sized business receives a loan, they also incur an influx of cash. That influx appears on the section of your business’s cash flow statement as positive inflow (which all lenders value significantly).
To discuss how National Credit Partners can help you with a loan for your small business, contact an experienced and dedicated member of the team today. We’ll review your company’s financing needs and provide the best available solutions to ensure you achieve both your short-term and long-term goals.
Choose a Trusted and Top-Rated Company in National Credit Partners
At National Credit Partners, we value each and every client. We’ve successfully helped small businesses in all stages of success (including those facing significant financial challenges such as defaults, collections, and legal actions) achieve permanent debt relief solutions. In fact, many of our distressed business clients were able to qualify for traditional financing (like SBA or term loans) after graduating our program.
With our decades of experience and proven results, the National Credit Partners team of dedicated professionals is here to help your business find a financing or debt relief solution that is tailored to directly meet your needs, goals, and challenges.
For businesses in need of debt relief solutions or modification:
- We strive to ensure that all advances are shown as ‘paid in full’ rather than ‘settled for less’ – assuring your business remains in good standing with lenders and qualifies for future financing.
- We provide every client with legal representation
These are just a couple of indicators demonstrating the personalized dedication we make to each and every client – which can prove to be considerably advantageous for your business in the long run.
Call us today at (888) 766-3998 or fill out the contact form below to arrange for a free and no obligation consultation with one of our skilled team members. We’ll review your company’s specific circumstances thoroughly and discreetly, and utilize our decades of experience and proven results to help you obtain cash flow financing or successfully modify your existing debt.
Don’t settle for an unproven financial program that could potentially make your business’s financial situation worse through inexperience or a lack of dedication. Choose National Credit Partners, the company offering direct, strong, and proven relationships established with countless creditors. We’ve helped companies like yours achieve the financial solutions they need to make a fresh start, and will help in identifying the debt relief option that is right for you.
As your premier and Better Business Bureau A+ rated debt consolidation company, National Credit Partners is comprised of financial professionals specializing in helping small and medium-sized businesses like yours achieve both the financing and debt relief they need.
Complete the form below and one of our team members will reach out to you immediately.
If you are one of the many thousands of companies struggling with high interest business loans, call us today for a free consultation. Just taking the first step in talking to an expert can start relieving stress. And once you talk to a debt help specialist, you will see that there is hope.
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