As the Christmas period draws nearer, many businesses in the hospitality and retail sectors look forward to their busiest trading period in the year.
However, the busy period comes with its own set of problems. A large concern for most businesses in this time is the health of their cash flow, and whether it will hamstring or help them capitalize on the opportunity Christmas brings.
That’s starting to show with applications for small business loans in November increasing 190% on October in the Food and accommodation sectors, new data from OnDeck shows. This foresight is will help those businesses feel confident they can trade through with extra operating hours, staff and stock, making the most of this important trading period.
The most important question then is not why, but what kind of finance should a business look for to help manage its cash flow through the holiday period?
Term loans (or “Business Loans”) can offer a quick injection cash that can be paid off over a 6, 12 month or longer term. This can seem like a good idea – larger chunk of cash, longer time to pay. Simple, right? The issue comes with when the cash is needed, what you’re paying to use that cash when you don’t need it, and when the repayments fall due.
With a Term Loan, you draw down the full approved amount on day 1, and start paying interest on the whole amount from day 1.
So, if you get approved for a $50,000 loan with a 12-month term, you take the full $50,000 into your bank account and start paying back repayments with interest, usually a week from when the money was deposited. However, if you don’t need the money immediately, and instead are making sure you have enough cash to carry you through, then you are paying interest for a very expensive safety net to sit in your bank account.
On top of this, as the few surviving Starks say, “winter is coming”. During the colder months businesses will often see trading volume drop, yet just as predictably as the changing seasons, your repayments and interest will continue through the slower part of the year, eating into your cash flow when it could be at its tightest.
Line of Credit
Lines of credit are approved “loan” facilities that you can draw down on at any time that suits your business, without any further approvals. There are many different types, but the one most suited to the Christmas period is a cashflow line of credit.
A Cashflow line of credit will sit happily waiting for your business to need it, to purchase stock , pay for more staff or higher wage costs with holiday penalty rate, without costing you anything until you do.
It is a safety net, but unlike a large pile of expensive cash sitting in your account and slowly dwindling from repayments and interest, it sits costing nothing until its needed.
When the opportunity to use the cash to grow or trade more arises, the facility is available to draw on, at the opportune time for your business.
The repayment terms are often shorter, in the 2-6 months, meaning that the facility is paid off with the cashflow generated from the increased trade, and ready to draw down upon again when opportunity or need arises.
In summary, if you want to set your business up to trade through Christmas with the best possible chance to take advantage of all this silly season has to offer, a line of credit can be the safety net that helps you sleep at night (air conditioning will also help).
Tom’s Top Tips:
Hidden Costs – What to look out for
Hidden costs can often rack up, and don’t become apparent until you finally meet with your bookkeeper in the tail end of January.
Hidden costs to look out for with Lines of Credit are undrawn fees, line fees, or interest that is charged on money that has been made available but not drawn down. This should be avoided if it can. If your business hasn’t taken any cash, it should not pay any interest. (Seems fair?)
Drawing funds that aren’t immediately used is another very large and hard to measure cost. When a business draws funds it uses that money to drive more business, grow its revenue and increase profits.
Conversely, if the business borrows funds, but doesn’t use them for a period of time, then the business is not driving any more revenue from the borrowed money. If the business only uses half of the drawn funds, or waits a month or two to use the whole loan, then it has paid substantially more interest for the money it has used that it needed to.
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