If you're a small business owner, there's no use in asking for a loan, right? We've been told repeatedly that it's nearly impossible to receive credit and many simply take it as a fact because it's what they've heard so many times from other business owners.
But what if the opposite was true, what would business owners say if there was money just waiting for worthy borrowers to ask for it...
I know it sounds like the beginning of an infomercial, but it's true...
"The money is there but there's no demand, fewer people are asking for loans." Brenten Witherby, loan officer for RLDC said.
According to a Barlow survey cited in the New York Times article To Get a Business Loan, Know how the Banks Think, 70% of small businesses hadn't applied for any credit this past year.
Witherby suggests that fear is the reason for the decrease in applications coming into his office, and that many are waiting to see what the future holds before seeking out any loans.
There's no need to be afraid to ask... as long as you come prepared.
Before a lender will sign off on anything, they need to know more than how much money you want.
"Do your homework," Witherby advises. "It's all about having a good plan that recognizes and addresses challenges."
Lenders want to know how you plan to use the loan, and more importantly, how you plan to make money to pay it back. This is where knowing the financial health of your company can open (or close) the door on your future small business loan needs.
Business owners need to understand the importance of cash flow -cash flow is king after all - and current cash flow projections. Owners also need to present gross annual sales, revenue, and account balances.
Having a firm grasp on your financial health shows that your business is able to see the trends and adjust accordingly- making lenders more likely to help you. While some owners feel like they're jumping through hoops throughout the entire bank loan process, it's for their best interest.
"Jumping through hoops to you, is due diligence to me," Witherby said. "We want to make sure that the company is in the best shape possible. At the end of the day, they're happy with the hoop jumping."
The money is out there, you just need to know how to ask.
Before asking for a loan, make sure you know your numbers- download Basic Accounting Structure for free
Just last month, Business First reported that nearly half of business owners have been experiencing cash flow problems these past three months. While the state of the economy can bear some of the blame, the importance of cash flow is something that many business owners greatly underestimate.
So what exactly is cash flow and why is it so important? A company's cash flow is the revenue stream that changes a cash account, or simply, the movement of cash in and out of a business.
Cash flow management is crucial for a business's survival. Sufficient cash flow means that you have enough money on hand to pay creditors, employees, and other emergency bills that might pop up along the way. Having ample cash flow also gives you the opportunity to use the extra cash to expand your business. On the flip side, having little to no cash flow means that your company may be on the verge of bankruptcy.
Cash flow analysis can be classified into three separate areas- operational cash flow, investing cash flow and financing cash flow.
Operational cash flow comes from a company's internal business activities (sales, labor, and purchase of materials). Cash that's received from the sale of long-term assets, or spent on investments is called investing cash flow (purchasing capital). Financing cash is cash that comes from the issuance of debt and equity like loans, loan repayments, and ownership shares.
All three of these categories equal the net cash flows that are necessary to reconcile the cash balance.
Here's a quick example of a positive $550.00 cash flow.
A Cash flow Statement tells a company's story. It helps the owners not only reflect on the financial health, but also allows them to budget for the future. It truly is the lifeblood of every business.
Ding! Ding! Ding! It's time for the third and final round of the Debit and Credit Showdown, which means you're one step closer to understanding debits and credits. During Round 1, we learned some of the big punches that debits and credits pack. In Round 2, we bobbed and weaved our way around the double-entry system, and for Round 3 it's time to pull out our big guns because we're going to knock out the recording process.
There are three steps to the recording process:
- Analyze how transaction affects accounts
- Adding debits and credits to a journal
- Transfer journal information into ledger account.
Thankfully, we can enter this information into our financial management software once, and it takes care of everything else instantaneously. But in order to truly understand how it works, it is best if we understand what goes on behind the scenes.
The most important part of that process is to understand how the transaction will affect the debits and credits.
Let's say you invest $10,000 into your boxing glove company- Acme Boxing Gloves. First, we would debit cash to show an increase of an asset, and we credit owner's equity to show increase of capital.
The second step is to record the transaction into a journal. The general journal requires the date of the transaction, the name of accounts affected, the amount debited/credited and an explanation of the transaction. Let's use this as an example: You invest $10,000 into Acme Boxing Gloves (ABG), and then purchase some equipment for $5,000 and office necessities for $1,500 both with cash. You then purchase additional equipment for $1,200 and office supplies for $300 all on an account. It would look something like this in your journal:
Seeing how the transactions are recorded in the journal helps to understand that "law of conservation" effect we talked about in Round 2.
The third step is to transfer all of the entries into a ledger, which contains the sum of all of your T-Accounts. Acme Boxing Glove's Cash account would look like this:
In the cash account you enter all cash inflows and outflows for the period into the T-Account under either debit or credit. After adding each side together, the cash account should have a debit balance of $3,500. That means that during that specfic point in time, Acme Boxing Gloves has a cash balance of $3,500.
It may not have been a total knock out, but if you made it through these 3 rounds and came out with a better understanding of debits and credits, you've won the fight. If not, there's always a chance for a rematch, just make sure you train properly.