Small Business Finance Basics and Questions

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.

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

How does cash flow factor into our business planning?

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.

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.

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?

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? 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.

Chapter 2

Working Capital

Working Capital Basics

Why is working capital important?

Working capital is critical to the success of your business. Without working capital, you cannot operate, as it provides the free cash flow required to purchase inventory, pay employees and contractors, lease your space, and more.

When is working capital used?

Working capital is used every day that your business is in operation. It's used to stock your shelves, pay your team, and otherwise operate your business. Working capital may also be used by lenders and investors as a measure of the liquidity, efficiency, and the financial health of your business.

Where does working capital come from?

Working capital can come from your operating, financing, or investing activities.

Is working capital the same as cash flow?

Cash flow measures the funds flowing in and out of your business over a specific period of time, while working capital is the sum equal to your current assets minus your current liabilities.

How does working capital affect cash flow?

Without working capital, you do not have the cash flow to pay your company's short-term expenses. Keeping your cash flow positive is the key to ensuring you always have enough working capital to operate your business and meet your obligations to creditors, employees, and clients.

Who is responsible for calculating working capital?

As a business owner or manager, you can calculate working capital using the figures provided to you on your company's balance sheet.

Where is working capital on the cash flow statement?

Your cash flow statement shows the amount of cash flowing in and out of your business from operating, financing, and investing activities over a specific period of time. It's a critical financial document, but you won't find working capital here.

Where is working capital on the balance sheet?

Working capital is one of the easiest calculations to work out from your balance sheet. Simply subtract your current liabilities from current assets. As a rule of thumb, experts like to see that a company has enough working capital to pay all of its expenses for one year.

What is working capital management?

Working capital management is closely linked with cash flow management. Together, these disciplines help to ensure that you always have enough liquidity and cash flow to meet your financial obligations and grow your business.

Why is working capital management important for SMBs?

Small and medium-sized businesses tend not to have large reserves of liquid assets. In fact, too much working capital isn't necessarily a good thing. Taking a proactive approach to managing your working capital helps ensure that you are making informed financial decisions for your business.

How much working capital do I need?

As a rule of thumb, you should have enough working capital to pay all of your bills for one year.

When is net working capital positive?

Positive working capital means you have more current assets than liabilities, and can cover your financial obligations over the next 12 months.

What happens when working capital becomes negative?

Negative working capital means you have more current liabilities than assets. For example, a construction contractor may find themselves in a position of negative working capital when beginning a new project, due to the large outlay of cash required for purchasing materials and contracting vendors. It's critical to limit periods of negative working capital as much as possible.

Can positive working capital be too high?

Absolutely. If you hang on to a large amount of positive working capital (greater than one year's worth of liabilities), investors and lenders might actually see this as a drawback. Those funds could be better spent investing in the growth or improvement of your business.

What will increase working capital?

You can increase your working capital through operations, financing, or investing activities by filing and collecting invoices, reducing expenses, increasing sales revenue, reducing inventory volume, and more.

How can working capital problems be solved?

Working capital provides the cash you need to operate, so staying on top of it is one of the most beneficial things you can do for your business. Collect payments as quickly as possible to keep cash flow positive. Avoid using working capital to finance fixed assets like equipment; deploy short or long-term financing here, instead. Don't be afraid to borrow to invest in your business, and make sure you're maximizing the value of your accounts receivable by using a tool like invoice factoring to convert working capital to free cash flow as needed.

What is cash flow and why does it matter?

Cash flow is the measurement of net cash and cash equivalents flowing in and out of your business over a specific period of time. Cash flow tells management, investors, and others whether your company is able to pay its current liabilities. It's an important determinant of your company's financial health.

How can I create liquidity in my business to fund payroll and equipment purchases?

Invoice factoring is an effective, inexpensive method of improving liquidity by speeding up your invoice collection cycle and putting money you've already earned to work for you sooner. It allows you to purchase inventory, buy equipment, make payroll, and otherwise fund critical business operations even while extending attractive credit terms to your clients. Here's how invoice factoring works.

Where can I find emergency working capital?

You'll need to proactively plan to keep your working capital and cash flow positive to avoid financial crises. Then, view our pricing to see how inexpensive it is to put this innovative financial management strategy to work for your business.

Chapter 3

Small Business Financing Solutions

Debts, Assets, and Growing Your Business

This chapter turns to a different set of questions: how the assets, debts, and credit history your business already has shape the financing options available to you as you grow. Topics covered include:

Many of these questions come back to the same theme covered earlier in this guide: using your company's assets or personal property as loan collateral carries real risk, and businesses without a long credit history or large asset base often find it hard to qualify for traditional debt financing at all. That's one of the reasons alternative tools like invoice factoring — which advances cash you've already earned rather than creating new debt — have become a go-to option for growing businesses. See if you qualify.

Chapter 5

Alternative Finance

Alternative Finance Options

What are some alternatives to bank loans for small businesses?

If you've been rejected by the big banks, you're not alone. It's critical that you soldier on to raise operating capital, though: a U.S. Bank study found that 82% of business failures are due to issues with cash flow. Some of the alternatives to bank loans for small businesses include:

What's the best way to get funding when banks and lenders don't believe in our idea?

When it comes to funding your small business, there are a few important considerations to keep in mind:

1. Ownership and control of your business.
2. Interest rates and financing fees.
3. How repayment is structured.
4. Protecting your personal assets.

Consider the potential impact of creating new debt or giving up some ownership or control of your business. There's even greater risk in putting your personal assets up as collateral. Alternative finance companies are giving small businesses more and better funding options by using technology to find efficiencies. With FundThrough's invoice funding app, for example, you can raise capital using revenue you've already earned.

What's the difference between traditional and alternative business funding?

There are a few key differences between traditional and alternative business funding:

1. Traditional funders generally want to see that you are an established business with a lengthy, positive business and personal credit history. Alternative funders are open to evaluating your fundability using different criteria.
2. Traditional funding can take weeks or months to secure, while alternative funding like invoice factoring can be available in just a few days.
3. Traditional lenders will likely want to evaluate your personal credit score as well, while alternative lenders are looking at other factors in evaluating your application.

What are my options for short term business funding?

If you're operating an established business with stable, steady cash flow and have great credit, you might consider a bank loan. The odds aren't in your favour, considering that over 80% of small business loan requests are turned down by banks. Only half of applicants will receive anything at all, according to the Federal Reserve Bank of Cleveland, and it may not be near what you need to keep your business afloat.

For short term funding, invoice factoring can't be beat. It enables you to put cash you've already earned to work for your business right away, rather than waiting weeks or months to get paid. Invoice factoring also negates the need for taking on new debt, paying high interest or finance fees, or giving up an ownership stake in your business.

Can companies get a cash advance?

Absolutely, but make sure you understand all associated fees, terms and conditions, and interest. Traditionally, companies that offered invoice factoring would purchase your invoice, advance you about 80%, and go collect from your clients. There are a lot of companies out there today that operate more like payday lenders, advancing your funds but charging extremely high interest rates.

Use a reputable invoice factor like FundThrough to have invoiced funds advanced to you. You pay one simple fee on the amount funded, with no additional service fees or interest charges. Calculate the total cost of invoice funding here for free.

How can I calculate the cost of a bank loan?

To calculate the cost of a bank loan, you'll need to know the amount being borrowed, the length (term) of the loan, and the interest rate. A simple online calculator like this one offered by Bankrate.com allows you to plug in your figures and see how much a bank loan will cost.

Where can I find a business loan rates calculator?

For more complex business loans, try this online calculator that allows you to choose different interest types, additional fees, repayment schedules, etc. As you can see, business loans can get complicated — if you qualify.

Is there an alternative to a bank loan for financing my equipment?

Yes. Invoice funding is a smart, proactive alternative to bank loans that can help improve your cash flow and prevent cash flow gaps, finance new equipment or inventory, hire new talent and more. You don't need to jump through the hoops of traditional lenders or worry about high interest charges and hidden fees, either. Learn more about how invoice factoring works here.

How do I calculate the total cost of each of my financing options?

Use the calculators above to compare your financing options. You should also factor the following into your funding decision:

• What do I need to do to qualify?
• How long will it take to access the funds?
• How will this affect my business in the long term?

Learn more about how FundThrough works and why business owners chose invoice factoring to finance their businesses in our customer reviews.