Cash Flow: What It Is And Why It Rules Small Business Lending

by Rino Abdulah April 08, 2023 Posting Komentar

What Are the Benefits of CashFlow Lending? from www.attractcapital.com

Introduction

Small businesses are the backbone of the economy, and they need access to capital to grow and stay afloat. One of the key factors that lenders consider when deciding whether to lend money to a small business is cash flow. In this article, we will explain what cash flow is, why it is important for small business lending, and how small business owners can manage their cash flow effectively.

What is Cash Flow?

Cash flow is the amount of cash that is coming in and going out of a business over a period of time. It is not the same as revenue or profit. Revenue is the total amount of money that a business earns from sales, while profit is the amount of money that is left over after all expenses have been paid. Cash flow, on the other hand, is a measure of a business's liquidity. It shows whether a business has enough cash on hand to pay its bills, meet payroll, and invest in growth opportunities.

Why is Cash Flow Important for Small Business Lending?

Lenders use cash flow to assess a business's ability to repay a loan. They want to see that a business has enough cash on hand to make loan payments and cover its other expenses. Small businesses often have irregular cash flow, which can make it difficult to secure loans. Lenders may be hesitant to lend money to a business that has unpredictable cash flow, as they may not be confident that the business will be able to repay the loan.

How Can Small Business Owners Manage Their Cash Flow?

Managing cash flow is essential for small business success. Here are a few tips to help small business owners manage their cash flow effectively:

1. Create a Cash Flow Forecast

A cash flow forecast is a projection of a business's cash inflows and outflows over a period of time. It can help small business owners anticipate cash flow gaps and plan accordingly.

2. Invoice Promptly and Follow up on Payments

Small businesses need to get paid on time to maintain a healthy cash flow. Business owners should invoice promptly and follow up on payments to ensure that cash is coming in regularly.

3. Manage Inventory Levels

Excess inventory ties up cash and can strain a business's cash flow. Small business owners should keep a close eye on inventory levels and only order what they need.

4. Negotiate Payment Terms with Suppliers

Small business owners can improve their cash flow by negotiating longer payment terms with suppliers. This can give them more time to pay their bills and manage their cash flow.

Conclusion

Cash flow is a critical factor for small business lending. It shows lenders whether a business has enough cash on hand to meet its financial obligations. Small business owners can manage their cash flow effectively by creating a cash flow forecast, invoicing promptly, managing inventory levels, and negotiating payment terms with suppliers. By following these tips, small business owners can improve their cash flow and increase their chances of securing loans.