4 Questions Seasonal Business Owners Must Ask About Borrowing
During the summer, Della's Delectable Delights, a gourmet market on the New England coast, is busy from dawn 'til dusk. But when the weather cools off, its apple pie and pumpkin-spice coffee sales aren't enough to even keep baristas on the payroll. It'll all be fine come late May, but how will you handle your poor cashflow in the meantime?
The off-season can be a time to get more creative than ever about finding new revenue streams — as well as new sources of business credit. But before going to market in search of funding, consider these four questions:
1. What's it for?
Knowing your needs can help you identify potential financing sources. For example, your vendors and suppliers might extend credit for new equipment or inventory you need to prep for high season. Or perhaps you need to...
Bring on and train more staff as the high season nears.
Fund your marketing plan. Don't let your customers forget you in the "in between" season(s).
Manage an emergency like unanticipated repairs or a natural disaster.
2. How much cash do you need?
Survey the past few years' business records to understand typical costs: Did your lack of advertising make for a lackluster opening day? Did you run out of critical supplies early in the season, then have to pay rush fees for faster delivery? Details like these will help you scope borrowing needs.
3. When do you need it?
Plan ahead, so you can have funds ready to go when you need them. When do you need to order and pay for your equipment inventory, for example, and how long will it take for you to gather documentation and apply for financing? You may not be able to drive your new forklift out of the warehouse in a couple of days.
4. What is your cash flow?
If you choose a loan with fixed monthly payment, you'll want to be sure you can cover it during slower times.
Take stock of your financing options
Get familiar with the most popular means of financing for businesses with have a predictable, seasonal revenue cycle.
Business credit card. Younger businesses can secure a credit card, even with a slim credit history. Using it well — staying within your credit limit and making payments on time — can help build your business credit score, which helps you qualify for other financing options down the road.
Business line of credit (LOC). If your cash needs are greater than the average business credit card, a LOC with higher limits might be the answer. These accounts can also carry lower interest rates and higher credit limits than you might be able to secure with a business credit card. However, interest rates tend to be higher than traditional bank loans.
Bank-issued business loan. Traditional bank loans typically offer lower fees and interest rates than most other forms of financing. However, tradeoffs may include more stringent application requirements and significantly slower approval times.
Short-term loan. With this type of financing, you'll pay back the lump sum you borrow by making fixed monthly payments over a set term. Terms vary — most run less than a year, but some go as long as 18 months — great timing for a seasonal business that wants to access cash during slow months and repay it during busier times. These loans may also come with less strict documentation requirements.
Revenue advance. The lender advances a lump sum of money in exchange for a percentage of your credit card sales. Because repayment works on a percentage basis, you'll pay less during slow periods and more during your boom months.
When you're armed with a solid understanding of your off-season capital needs and your financing options, you can make a smart decision that will benefit your business all year round.
Did you know?
Most small businesses are seasonal businesses: 8 in 10 surveyed say holiday sales are "critical" to their overall profit.
Source: SBA.gov
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