How Short Term Loans Help Boost Cash Flow
Published on 2020-10-05
Category: Business Loans, Small Business Owners, Cash Flow Management
Cash is king and a healthy cash flow reflects your businesses’ operating performance and its success. However, unprecedented events and changing market dynamics can always strike and create an imbalance in the cash flow, leading to mismanagement and business failure. This is particularly true to small businesses, as they are more vulnerable to sudden changes, like the one we are facing now with the pandemic. So, how can small businesses mitigate such business risks? The ideal solution could be a short-term business loan.
A short-term business loan can be an economical and versatile way to cover the cash flow shortages when times get rough. Most importantly, it allows you to maintain the cash flow in your business. Before we tell you how small term business loans can help boost capital for your business, let’s understand some important terms.
What is Cash Flow and why should any business care about it?
Cash flow is the net amount of cash, and cash equivalents that a business receives and transfers during a period. Here, inflows and outflows of cash from all business activities are taken into account. The ability of a business to produce value for its stakeholders is measured by its ability to make sufficient cash flow or, more precisely, optimize long-term free cash flow (FCF).
The cash flow statement is an accounting statement that describes the amount of cash and cash equivalents that a business enters and exits. The cash flow statement examines how effectively the company handles its cash position, which means how well the business raises cash to meet its liabilities and to cover its operational costs.
How to Boost Cash Flow from A Short-Term Loan?
As a business owner, maintaining an optimum cash flow should always be on top of the list. A recent study* by JPMorgan Chase identified the need to understand cash flow patterns and maintaining a cash reserve. But if you have not yet created a reserve, then there is the option of a short-term loan to boost cash flow.
Seasonal ups and downs are a part of any business. Despite the best of planning, you may be faced with a cash crunch. For small businesses, this might even mean a worst-case scenario of shutting down. Here, a short-term loan can help pay off suppliers, operational costs, taxes, and even employee salaries to keep the business running.
When operating a business, several unexpected situations demand immediate cash. The accounting principles state that a company must always anticipate future losses/problems and prepare a precise cash flow forecast. What to do in such a crunch situation? A short term loan is a one-stop solution and it can prove to be an emergency backup to meet the prevailing requirements.
Short term loans, when properly managed, can also be used for cash flow boost, handling surprise projects, fulfilling excess demand, bridging seasonal sales down, or for any other business need. There are no limitations on how to use the amount. These loans are a wise choice for those who are new to the market (say two years), who face credit problems, or who are not eligible for conventional term loans.
Utilizing short-term loans will help you meet your business objectives, boost your credit score, and credit history. It also helps you to be eligible for various other forms of financing such as a bank loan along the way. The trick is to be strategic in cash flow management to estimate the return on investment for your company.
There comes a time in business when growth and expansion become essential. You may be thinking of acquiring a store in a more upscale market, purchase a new warehouse, or maybe a larger building or office floor. The associated expenses are huge and require additional funds. The capital from a short-term loan can help augment your dreams.
Short-term loans are reasonable and flexible enough to help you repay it on time.
How to Calculate Cash Flow?
Cash Flow: Cash flow is calculated by adding and deducting all the cash outflows and inflows from different business activities. Below is the mathematical equation for the same:
Operating activities + (-) cash from investing activities + cash from financing activities
Cash flow forecast: Cash flow forecast is expected cash flow and it is calculated as:
Beginning cash + projected inflows - projected outflows
Operating cash flow: Net income + non-cash expenses - increases in working capital
Discounted cash flow (DCF): It is one of the most critical things to know before investing in a company. It determines the investment-based value of a company.
Formula = Sum of cash flow in period ÷ (1 + Discount rate) ^ period number
The Capital cost of a short-term business loan appears to be higher than long-term business lending, such as bank loans, but it has its fair share of advantages. For starters, you'll get the funds quickly and the payment terms are flexible. After having learnt how to manage the loan amount, you are ready to apply for one. For any business to get optimum returns, all operations should function smoothly.
Tagged in: What is Cash Flow?, Boost Cash Flow, Calculate Cash Flow, Cash Flow, Cash Flow Statement, Cash Flow Forecast, Cash Flow Management, Cash Flow Patterns, Free Cash Flow, Operating Cash Flow, Financing Cash Flow
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