Guest Feature | Financial Wellness: Build a Healthy Business to Access Low-Cost Debt Capital
By Chinwe Onyeagoro, Co-Founder and CEO, FundWell
Chinwe has a strong personal interest and professional track record devoted to helping organizations raise capital. Prior to co-founding FundWell, she co-founded, capitalized and operated a boutique consulting firm called O-H Community Partners (OHcp) that raised $120 million on behalf of clients across the country. Today she shares the first step to getting a loan is to understand your eligibility. FundWell makes this easy – just answer three questions online.
We all know the importance of health and wellness when it comes to our bodies and minds. We take regular steps – exercising, eating well, and reducing stress – to prevent major health issues and maintain a good quality of life.
We recommend applying this same focus to the financial wellness of your small business. Financial health is associated with certain “vitals” that you should constantly monitor and work to improve: Cash Flow, Credit, Customers, and Collateral. These “4 C’s” determine the state of your financial health and your eligibility for financing.
If you work to improve these areas on an ongoing basis, you will be able to access more and better funding. While each business has unique needs when it comes to financial health, there are some basic principles to keep in mind to constantly improve these indicators and improve your debt financing eligibility.
1. Cash Flow is a crucial indicator because it determines your ability to keep operating your business. Growing too fast without managing expenses can be just as dangerous as declining revenues. Consider how you can stage your growth in order to manage expenses while keeping more of your dollars in the business. Lenders want to see that your business has taxable income, which is an indicator that you have the cash flow necessary to service debt.
Timing: Track cash flow weekly using your accounting system, which should be integrated with your bank account. That way you will always have an accurate reflection of how much money you have in the business.
2. Credit comes in two forms – personal and business. It’s important to manage both to position yourself to access low-cost financing. The top tips to keep in mind in the area of credit are: 1) pay on time, 2) make sure your debt-to-credit ratio is 25% or lower, and 3) ensure you have enough income to cover existing loans and liabilities. By vigilantly making payments and keeping your balance in check, your credit score will stay at an attractive level. If your credit history has been tarnished, it is important to address or be able to explain these blemishes. Always do a cost/benefit analysis when making large purchases, especially in the early stages of your business.
Timing: Your total credit exposure, financing costs, and future needs should be reviewed during your month-end reconciliation process and considered any time prior to taking on new debt.
3. Customers are the reason your business exists, and you should work to maintain and cultivate them. Some key pointers are: 1) diversify your customer base and 2) ensure your revenue flows evenly and consistently throughout the year. Typically, a business should not have more than 25% of its revenue coming from any single customer or contract. Customer diversity gives lenders a level of comfort that you will be able to repay regardless of seasonality, industry volatility, and other unexpected shifts. In addition, lenders like to see repeat customer activity and low turnaround time on accounts receivables, factors which are typically associated with more predictable and profitable sales.
Timing: Revenue, A/R, and collections should be tracked daily, weekly, and/or monthly depending on your type of business and A/R turnaround. The more often you look at your numbers the faster you can deal with any issues. Review your client mix on a quarterly basis to uncover opportunities for diversification, new channels, or target markets.
4. Collateral is the fourth indicator, and it is especially important for debt financing. Generally, the more assets you have, the more comfortable a lender will be. It is good to have both fixed assets and liquid assets. If you have personal assets that you will be using as business collateral, consider transferring that property to the business. If you have to personally guarantee a loan, your home, mutual funds and stocks are good personal assets, while equipment, real estate, and accounts receivable are good business assets. Do a cost/benefit analysis when deciding to buy or lease any fixed asset over $3,000 and evaluate how it will impact your business balance sheet.
Timing: Assets can be reviewed quarterly, unless there is milestone basis for considering more frequently, such as additional space needed for a new store opening.
Depending on the funding product you apply for, lenders may care more about certain indicators than others. For example, merchant cash advance providers care a lot about your credit card-driven revenue. Asset-based lenders care about your fixed (e.g., property and equipment), and liquid (e.g., purchase orders, receivables, and stock) asset value. Other institutions will lend based primarily on the quality and credit of your customers and your longevity in serving them. To learn more about different types of lending products, click here.
To keep track of the 4 C’s of your business, create a financial wellness dashboard to provide a snapshot of how you are doing in each of these critical area and develop improvement plan steps and targets. You can build this in a simple spreadsheet – just make sure to monitor it regularly. By focusing on the 4 C’s, any small business can put strategic and tactical actions in place to improve financial health in the short term and over time. The healthier your business is the more eligible you will be to access more debt capital at lower interest rates.
FundWell is a small business loan matching and financial wellness site that helps borrowers get the best loan they are eligible for today and improves their eligibility for more capital at lower interest rates in the future. FundWell provides education, transparency, and assistance to help borrowers apply for loans and improve their financial health over time. Visit www.thefundwell.com to learn more and to get your loan eligibility. Email [email protected] to sign up for a 90-day free trial of FundWell’s Financial Wellness Program.
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