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Looking for a Business Loan? Be Prepared

8/10/2018

If you're building up a small business but haven't yet needed to borrow funds to expand or smooth out cash flow irregularities, you're doing something right. Or if you have borrowed and everything went smoothly, kudos again. Otherwise, keep in mind that anticipating the need for credit well in advance will put you in a much stronger position not only to secure a loan, but also to negotiate competitive terms. 

The key to achieving that outcome is to conduct a proper cash flow forecast — and maintain it. Looking out 12 months is generally sufficient, unless you're planning major strategic initiatives. Doing so allows you to account for seasonal variations in cash flow. Plus, it's important to be as accurate as possible, and that's tough when you're forecasting much beyond a year. 

Constructing a Forecast

If the process of creating a 12-month forecast sounds daunting, relax. The process consists of a simple spreadsheet with 12 columns, labeled by month.  Each month's column starts with a beginning cash balance, followed by a set of entries for your sources of cash that month (including receivables, cash sales, and loan proceeds) ending with a "total cash" figure. 

Next, you'll enter all the categories of "uses of cash" — such as payroll, vendor payments, rent, loan payments, and payroll taxes — followed by "total uses of cash." Then, of course, add a cell that subtracts total cash from total uses of cash, and label it "end of month cash." It's that simple. 

Let's say your first month of the forecast is July. The "end of month cash" total for July becomes the "beginning cash" for August. 

Where do the numbers come from? Look at your history, consider factors that you know or expect will change the numbers going forward and adjust accordingly as you plug them in. For example, if you know your sales usually slump in October by about 5%, adjust your sales revenue to account for this. If you pay your full year of business insurance in March, pencil that in. 

After you have completed a full year's forecast, your spreadsheet will reveal where you think you'll wind up at the end of each month and the end of the year. As each month passes, update the previous month's forecasted numbers with the actuals to maintain maximum accuracy. And keep adding a new month after you've ended your current month, to give you a rolling 12-month forecast.

Reality Check 

As you maintain the process, assess the accuracy of your original monthly forecasts. If you're consistently too optimistic or conservative, determine whether the actual numbers were aberrations or if they're the "new normal" that you should keep in mind going forward (and revise your forecasts accordingly). 

Now you're ready for the payoff for all the number-crunching: determining your possible need to borrow. Alternatively, you may find that, based on your forecast results, you don't need to borrow at all and can proceed using the projected operating cash or even build a cash reserve. 

Your forecast could also tell you that, while you're not likely to run short on cash, you could afford to make payments on a loan that would enable you to make a timely investment. Or the projection might tell you that you'll do fine by the end of the year, but you will likely experience a two-month period when you'll need a temporary cash injection to tide you over. 

If you do expect to borrow, the sooner you know it, the better. In general, the longer the period before you'll need the loan proceeds, the stronger your standing with prospective lenders. When you approach them several months in advance of when you need the funds, you should be in a better bargaining position to get favorable terms. That's because, with time on your side, you won't be tempted to take the first loan offer you get. Lenders will know you have the freedom to shop around. 

Points of Distinction 

Here's a rundown on the basic features of business loans that you'll need to consider:

This is just a starting point for considering your possible need to secure a business loan. Talk to an expert to get the complete story before taking the plunge.

 

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