The Ultimate Small Business Finance Guide

Chapter 1: Small Business Finance Basics


What kind of financial planning do small businesses need?

Ideally, your small business financial plan will contain key statements and projections or forecasts that help inform the actions of the business. These include:

  1. Personal financial statement
  2. Balance sheet
  3. Cash flow forecast and cash flow statement
  4. Income statement
  5. Accounting ledger
  6. Supporting documents for taxation, insurance, real estate, etc.

Using accounting software can help make your financial planning and record-keeping more effective and less time consuming. When you need to apply for funding, you can reduce the legwork of having to recreate all of these statements for your application. In fact, with FundThrough, you don’t need to submit any of these statements at all, as our app simply integrates with your invoicing software.

Small Business Borrowing: How To and Planning Questions

What is cash flow?

Cash flow is the lifeblood of your business. It’s the measure of how much money is flowing into your business versus the amount flowing out over any given period and without it, your company can’t meet its financial obligations. You can learn more in The Ultimate Cash Flow Guide.

How does cash flow factor into our business planning?

If you’re wondering, “Is cash flow forecasting part of a business plan?” the answer is YES! Negative cash flow is the number one reason businesses fail; if there’s one place you’re going to focus your energies, this is it. Cash flow statements are a critical tool as you grow your business, to show you exactly where you stand at any given point. Cash flow forecasting will help you foresee any potential gaps before they happen, so you can proactively put cash flow tools to work.

What is a cash debt coverage ratio?

Your cash debt ratio is the measure of net cash from operating activities versus your average current liabilities. This tells you whether your operations can support payment of your current liabilities. The cash debt coverage ratio formula is:

Current cash debt coverage ratio = Net cash from operating activities / Average current liabilities

How do you get approved for a business loan?

If you don’t have all of those things, it can be challenging to impossible to get approved for a business loan. Many owners turn to private lenders, investors, or VC firms next, but this can mean giving up equity in your company or having to agree to high interest rates and unfavorable loan terms.

That’s why so many entrepreneurs and small businesses are choosing to use more creative sources of funding that allow them to bootstrap their own business. One way you can do this is by making better use of your accounts receivable through invoice factoring. Here’s how it works.

What is the difference between secured and unsecured financing?

Secured financing means the borrower has used an asset of some sort as collateral. This can be a risky strategy. Imagine using a large piece of business equipment as collateral, then losing a major contract that caused you to default on your loan. Your ability to do business at all could be limited or even eliminated. Sometimes banks ask small business owners to use personal property such as a home or retirement savings as collateral as well. The risks involved are too great for many owners to stomach, which is why more are turning to innovative new alternative financing solutions like invoice factoring, which advances funds you’ve already earned rather than creating new debt.

Capital injection vs loan: What's the difference?

A capital injection is an investment in your business that gives you operating capital. A loan is just one method of injecting capital in your business; other methods include owner investments, VC funding, and invoice factoring.

How can I quickly establish credit for my new business?

Traditional lenders like banks want to see an established credit record before they’ll even consider lending funds to a business. The best way to establish credit is to carry at least two revolving credit products (such as a credit card and line of credit), and to not only use them regularly, but pay down the balance each month, as well. While you establish your company’s credit, you can use a cash flow tool like invoice factoring to speed up your accounts receivable and free up funds to grow your business.

How important is it to be proactive in small business financial management?

It’s critical! You can’t just set-it-and-forget-it with your small business finances. Run important financial reports including your balance sheet and cash flow statement regularly and use a cash flow forecasting tool to get ahead of any potential gaps in cash flow. Considering that negative cash flow is the #1 killer of small businesses, cash flow forecasting and management are the most important aspects of your financial management activities.

How do small businesses find alternative funding?

Well, you’re in the right place and already have a head start! Invoice factoring is one of the best ways to improve your cash flow while limiting risk, as you don’t need to take on new debt to fund your business using this tool. Invoice factoring advances revenue you’ve already earned, so you don’t have to wait 30 or 60 days (or more) to collect on your invoices. You can learn more about how it works here.

How do startups find funding without giving up control and ownership?

Finding funding without bringing on investors or giving up equity typically requires that you make creative use of your company’s assets. What assets, you ask? You’re right, most small businesses don’t have much in the way of assets – especially not anything they can afford to lose by using it as collateral. That’s why invoice factoring has become the go-to funding tool for all kinds of businesses, from contractors to manufacturers to retailers and more.

Invoice factoring puts the power of your accounts receivable to work for you by advancing your invoices. You retain full ownership and control and because FundThrough operates in the background, your clients never know you’re using an invoice factor. Check it out.

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