It is always good news when your business finally starts making money and you are contemplating on expanding the business further. If you lack funding, the natural choice would be to make a loan to push the expansion forward.
There are loans offered for small businesses by banks and other financing companies that can help you make the next step. Once your loan is approved the next challenge is to manage your finances well so that you will be able to pay the monthly interest and principal. You don’t want to default on your loans.
Rajan A. Uttamchandani, CEO of Esquire Financing says about loaning to entrepreneurs, “you only extend to them what they can pay on a monthly basis without any headache or without any stress because what will happen when you extend more than you need to extend, right?”
He advises entrepreneurs to know how much money comes into the business and make sure there is a match between cash flow and debt servicing. “For example, if you are extending too much to a business who can’t afford your monthly payments, for sure you will default even if you are collecting interest on it. You will never get paid the principal. So you are better off figuring your net inflows on a monthly basis and what your free cash flows are to pay off these debts and make sure you amortize based on that.”
Depending on the nature of the business, cash flow can be seasonal. For example, flower shops will reach peak sales during Valentine’s Day, Mother’s Day and the December holidays. So it is better to structure payments based on what you would expect. “I think the other thing with managing cash flow is knowing what your profit is and what your capital is. If you are looking at the retail business for example and let’s say P100,000 comes in. That is not all your profit. You can’t spend P100,000 and presume that is income,“ adds Sandeep G. Chandiramani, Chief Finance Officer for Esquire Financing.
Another useful tip for managing your cash flow is breaking down your debt payments to manageable daily amounts. Let’s say for a food retail business, start allocating a certain amount of daily sales to debt servicing. If you need to pay P50,000 a month for a loan, how much will you need to collect from daily sales to cover it? Make sure to plan ahead and plan well.