Working capital can sometimes be, well, difficult to work around. So, from spreading your risk, to bricks and mortar security, we’ve outlined some tips and strategies to help make sure you’re in the best position to grow your business and have the cash flow you need to keep calm and carry on.
Wages out every fortnight? Stock to Pay for? Power, Insurance, Rent – all that to pay and you have given your customer 60 day terms?
Understanding the working capital requirements of your business is key to ensuring that you have the cash available to fund those requirements. A Squirrel Commercial Adviser can help you ensure that your lending is set up to provide for that rainy day and ensure that any funding gaps in your trading business can be met.
Ever heard the expression, "Don’t put all your eggs in one basket"? Well it couldn’t be more true when it comes to business.
As a good rule of thumb, you should look to spread your risk across 2-3 lenders, depending on the size of the banking relationship. Banks will often look to tie in property via a General Security Agreement (GSA) or Guarantee so wherever possible, separating property from business via split banking can be a good way to manage this.
Some of the smaller lenders aren’t always so keen on business lending, so having owner occupied properties through one of these and business banking with one of the bigger banks can be a good place to start.
More often than not, a bank will look for bricks and mortar to secure lending and reduce their risk. The more residential security the bank has, the lower the risk. This can work in your favour, because business lending is priced based on risk. So the lower the risk, the better the price.
What’s our number one piece of advice? Whatever you do, don’t wait until you need money before you ask for it.
Running good cash flow forecasts and updating them regularly will help you plan. Look for gaps in the future where cash flow could be tight. If you can manage it through the business – do that. If not, speak to us before things get tight. Banks respond a lot better if you’re up front and have a clear idea of where your business is at and where it’s going. If cash flow is tight, make sure you understand why.
Asset finance is also a good product that’s sometimes underutilised by businesses. It can be a cheap way to fund assets and can sometimes even release funds to put back into the business if you have freehold assets. This type of funding is highly dependent on the asset, the age of the asset and its current market value.
Banks will often fund lending for business purposes unsecured, but this would normally need to be supported by either a GSA over the business assets and/or a Guarantee from the directors. The amount and type will depend on the business itself, directors and the purpose of lending.
To determine the rate, the bank will assign a rating to your business. This is based on the security you’re offering, performance of the business, both now and in the future, the industry and the business itself. This rating then determines the interest rate that will be applicable. The lower the risk, the better the rate. So do your homework and planning carefully.
Banks will generally look at the following for business lending:
If it’s existing, what is the trading history and what’s changed to require this funding? How will it increase sales and net profit?
If the business is new, what’s the experience of the directors within the industry, what’s the brand and is it proven.
Have you completed cash flow forecasts and business plans and have the directors undertaken anything to assist with this?
All of these can really help the request and show that you are fully committed to the proposition.
Banks don’t normally like funding capital alone. You need to show commitment to the business.
Banks will normally only fund a loan for up to a maximum term of 15 years, but a 5-year term is more common.
You could apply for a personal loan via our peer-to-peer lending platform. The main thing to keep in mind, no matter where you’re applying for a loan, is that you have sufficient income and good debt servicing history (plus security if needed) to support your loan application.
If you apply for a personal loan via Squirrel, we’ll assess your application individually and you’ll be treated as a person, not just another number. Working Capital loans don’t have to be stressful, as long as you have a solid business plan on how the funds are going to help grow your business.
Find out more about Squirrel personal loans.
There are heaps of tools that you can use to do your own forecasts and business plans, and most banks also have their own tools available online. It’s also fairly easy to find general templates and advice online, like NZTE (New Zealand Trade and Enterprise).