Cash flow down or striving to get ahead? A loan could help. — business.govt.nz

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Cash flow down or striving to get ahead? A loan could help.

Running short on resources, such as cash, staff or tools, is a risk for many small businesses. A loan or overdraft may help. We asked different types of lenders, from a bank to a line-of-credit lender, for tips on how to prepare a strong loan application. 

It’s common for small businesses that are doing well overall to experience interruptions in cash flow. Perhaps a seasonal change or unexpected event has occurred. Or your business is expanding at a rapid pace and would benefit from hiring a new employee or buying a new piece of equipment, but there’s not enough cash available to move forward.

Instead of trying to tough it out or bootstrap a solution, risking serious damage to your business, borrowing might help. Banks and credit lenders are likely to be interested in lending to you if you have:

  • the numbers to show it’s a financial blip
  • a plan to repay the loan.

Show your figures

Before you approach a lender, get your head around your finances. Prepare to be upfront about:

  • your current finances
  • why you need the loan
  • what you will do with the extra money
  • how you will pay it back.

“The more you understand and show evidence for your numbers, the more likely it is the bank or lender will be willing to assist,” says Nigel Gaudin, a business banking expert at Kiwibank.

“Before applying, it’s important to ensure your business is profitable. Online lenders will not give you money if you cannot afford to repay it,” says Lachlan Heussler from Spotcap.

Your past business mistakes don’t always mean a lender will say no. Lenders like those with experience who learn as they go.

Your past business mistakes don’t always mean a lender will say no. Lenders like those with experience who learn as they go.

Preparation is key. Gather these documents to use as evidence, whether you apply online or in person:

  • Balance sheet: Shows your business’s financial position right now.
  • Profit and loss statement: Shows financial performance in a period of time, eg last year.
  • Cash flow statement: Shows money coming and going over a period of time, with insights into patterns and problems.
  • Cash flow forecast: Predicts the future state of your cash flow, based on your cash flow statements.

Businesses are more likely to get finance if they are able to show their balance sheets, how their profit and loss statement compares to last year’s, and what they can do to increase cash flow if needed.

Also show how you will spend the money, and how much you can afford to spend on repayments. Use your financial statements as a guide.

Model your future costs and income to explore the impact of ‘what ifs’.

Model your future costs and income to explore the impact of ‘what ifs’.

See the step-by-step guide on our financial modelling page — there’s also a modelling workbook so you can test good, bad and in-between scenarios.

Financial models: Step-by-step guide

Choose the right loan

The best loan for you depends on a few factors including how long you have been in business, any assets you can use as security, and your finances.

It pays to think through different loan types to find one that’s right for you and your business.

Common types of business loan

Lines of credit: A set amount of credit, either time to pay a bill or a dollar amount. You don’t have to use it all. It’s like an overdraft managed in a separate account, or a revolving mortgage. Your credit limit depends on your business, and will typically be assessed against the value of your cash flow for the period of the loan.

Secured loan: When the lender has the right to take asset(s) listed in the loan agreement if you can’t keep up repayments. To decide how much to lend, and at what interest rate, lenders will look at your physical and financial assets, eg company car, machinery, stock, and invoices. Lenders use LVR — loan to value ratio — to work out the loan amount, eg if your assets are worth $2,000 and the LVR is 60%, you can borrow $1,200. A lender may also decide an interest rate based on your business plan, so it’s important to be prepared and do your homework.

Leveraging your home as an asset is a common way for businesses to secure funding. However, you may be charged a ‘business use’ fee on top of the mortgage rate because the money is being used for business activities. There are risks to consider in this approach – in the worst case scenario you could lose your house – so it’s best to make sure you’re fully comfortable that this is the best option for you, and if in doubt talk to a business advisor or accountant.

Unsecured loan: Not all lenders require hard security, especially if your finances are typically stable. This option could work for you if you don’t have an asset to lend against. Online lenders, like Spotcap, base their assessment on real-time business performance and artificial intelligence, meaning they can provide funds within 24 hours.

Asset finance: A loan for a specific asset, eg a delivery van. The lender buys the asset for you, then you pay them back in monthly instalments. The loan is secured against this new asset, and perhaps existing assets too. These loans are usually shorter term, from six months to five years.

Case study

Dani's profits

Equation: contribution margin

Dani has taken over her parents’ bakery and is keen to expand — either by opening another store, or by baking for more cafés and restaurants.

She wants to know if the bakery makes more money from walk-in sales, or sales to other businesses. She and her accountant break down her income statements to separate the variable costs from fixed costs and show the difference in costs and earnings.

They then look at the contribution margin — which shows if something earns enough to cover its variable costs and help pay fixed costs — for both income streams.

Selling to other businesses has a better contribution margin, so Dani decides this is where to focus her efforts. She’ll also continue to offer walk-in sales. The contribution margin is smaller for walk-in sales, but it allows her to buy ingredients in bulk to bake for her business customers.

Dani wouldn’t have thought of expanding in this way if she hadn’t set time aside to understand the bakery’s financial statements. Her parents had $15,000 in goodwill on the balance sheet, due to informal agreements to sell doughnuts to local cafes. See how she turned most of this goodwill into $13,000 worth of supply agreements — an asset more attractive to lenders and investors — on our financial statements page.

Case study: Dani’s goodwill

Follow Dani’s story as she uses forecasting to set a budget for a new commercial kitchen to handle increased demand.

Case study: Dani’s financial model

Don’t accept any offer without carefully checking the terms and conditions.

Don’t accept any offer without carefully checking the terms and conditions.

Different types of loans come with a wide range of interest rates. Understand the true cost, eg the total amount you will pay over the life of your loan, before you apply.

Borrowing money

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