Depending on your lifestyle, industry and countless other factors, it can be hard to know how much of the money you earn should stay within your business and how much should go to paying down your mortgage. After all, you founded your business on the belief that this is your livelihood: It might have been your dream, but now it’s very much a reality. Even if your personal and business cash flows are indeed separate, it can be tough to view them as such.
Here, too, it’s important to plan exactly where funds will be heading on both a personal and business level. It can be all too easy to pull too much from your business bank account to pay for that mortgage, or any other countless personal expenses you encounter on a daily basis.
A healthy business bank account should never dip below zero, resulting in the dreaded “non-sufficient funds.” In order to avoid this, leave an extra couple of thousand dollars sitting in your business checking account if at all possible.
At the very least, this is a rainy day fund. In its truest form, that cash cushion can mean the difference between success and failure, especially when it comes to getting a business loan with no money down or in the bank.
If you’ve applied for a business loan before, or at least looked into it, you likely know Tennessee title and payday loans Oliver Springs that small business lenders often reject candidates who don’t have a cushy bank account balance to back up their applications. But if you need to get a business loan with no money, you should understand why lenders care about cash flow in the first place.
At the most basic level, cash flow indicates the health of your business. Positive cash flow means there’s more money heading in your direction, and a negative cash flow often means a business is struggling.
Of course, you care most about your cash flow in terms of how it’ll affect your day-to-day operations. But as soon as you land in the small business financing market, your solvency is important to lenders, as well. How do lenders determine whether they feel comfortable extending you a loan? In large part, by investigating your cash flow.
How lenders see cash flow and assess risk
As mysterious as they might seem, lenders are actually pretty easy to understand, especially when you’re considering their business loan requirements. One of their most crucial requirements is cash flow.
Some lenders require a certain amount of funds in a potential borrower’s business bank account before they’ll even consider extending a loan. Other lenders are a little more forgiving of cash flow, as long as other requirements like personal creditworthiness are strong.
Every time a lender extends a loan, they’re taking a big risk. They need to know that a borrower is able to manage additional debt, and has the financial capacity to repay that debt in full.
So, the terms of a loan are always a reflection of that risk
If lenders deem a business risky, they’ll hike up the interest rate, increase payment frequency and shorten the repayment period. If they view a business as low risk, the opposite will occur.
Low bank balances are a big contributing factor toward a riskier business assessment. A major reason for this is that loans operate on automatic withdrawals. If your loan requires you to make weekly payments of $400 but you never have more than $1,000 in your account, chances are you won’t be able to consistently pay your loan bills in full and on time. Needless to say, this isn’t a good situation for you or the lender.