Is there a right time to apply for more capital for your business? In a word, yes. The reality is you don’t want to wait until your business is desperate for cash to ask for it. By that time, it may be too late—even if your business is still profitable on paper. To understand why this is, we need to break down the difference between profit and cash flow.
Profits vs. Cash Flow
People often think of business success in terms of profits and losses. However, the reality is that 60% of businesses that fail are actually profitable when they go out of business. The problem is they’ve run out of cash to pay for their expenses. While it’s great to have a profitable business, profits do not equal cash flow.
Your business’ cash flow is the difference between your available cash at the beginning of an accounting period and the end of it. This money includes cash from sales, your loans, investments, and the sale of assets. On the other hand, profit is the amount left over after you’ve paid your business expenses.
Cash flow is all about timing. For example, if you spend a significant amount of cash on inventory or a new piece of equipment in May, but you do not collect your customer receivables until July, you could be in trouble in June. Even though on paper your business might still be profitable, you don’t have the cash to cover your expenses. So what’s the big deal? You can just apply for another capital grant from your capital provider, right? That’s where things can get tricky.
Don’t Wait Until it’s Too Late
Even if we’ve provided your business capital before, we’ll have to go over your business particulars again before approving another injection of capital. If your business has become risky due to lack of cash flow and poor business planning, we might not be able to offer you more funding.
While it might seem counterintuitive to ask for capital when business is doing well, that might be exactly what you need to do to keep your business on track. After you’ve been in business at least three months earning $5,000 or more in revenue, take a look at your cash flow. Analyze the trends and anticipate when you are likely to need capital. Then create a detailed plan for your account manager that clearly outlines when and why you will need the extra funding. If your business is doing well and your future vision makes good financial sense to your lender, you are much more likely to secure the capital you need.
Talk to your Capital Provider
As we are your National Account Executive’s, we’re here to help you every step of the way along your business journey. The best way we can do that is for you to communicate with us as much as possible in regards to your business’ finances. If you have questions about increasing your capital—or anything else—give us a call today!