5 Ways to Ease Your Client’s Quest for Financeby
Businesses don’t often have money when they need money. Unlike earning a salary in industry, business owners need to deal with cycles in the economy, unexpected events and their client’s desire to pay on their own time schedule.
There will be times, now and in the future, when cash flow problems will occur and they will need capital in a hurry. How can you advise them on securing it?
This article takes a look at five simple ways you can best advise your clients on their path towards securing necessary financing.
1. Cash Flow Forecasting
It’s a principle every business owner needs to understand. Often people will run their household finances in a disciplined manner, yet make optimistic assumptions about future business that get them into serious trouble.
When a person is paid by salary and possibly a year-end bonus, they know two things:
- How much cash flow they have now
- The possibility of a cash bonus in the future
Budgeting for monthly bills is forecasting over the short term. Estimating on the size of their annual bonus and how the funds might be used is closer to longer term forecasting.
Forecasting cash flow for a business is much more difficult. The business might be seasonal, booking more revenue in the summer, less in the winter.
An economic slowdown may mean clients won’t be paying on a timely basis. Optimism can be a major obstacle. If business suddenly improves, business owners might assume this is the “new normal” and the good times will last forever.
They ramp up spending instead of paying down debt or building a cash reserve. They quickly forget the economy and business run in cycles. If the cycle shifts and business slows, it’s easier to consider it a temporary lull instead of a change in the overall trend.
As their accountant, you can help them plan for the future. They need to implement on cash flow forecasting as part of their business planning. They need to analyze data to spot trend changes.
It’s a cautious strategy, but it can also be used to highlight opportunities. There might be growth and expansion in the future if the business owner prepares properly.
2. Importance of the Line of Credit
When your client started their business, you advised them to setup a line of credit with their bank immediately and your logic was obvious. Their cash flow is uneven, but bills need to be paid on time.
Consumers accumulate credit card debt because it’s far easier to spend than it is to show discipline and pay down debt. Suddenly, they find themselves with a huge outstanding balance.
When interest rates are low, your client may not see a compelling reason to bring their outstanding balance owed as close to zero as possible. Explain the logic with the worst case scenario: If the economy slows and clients cancel orders or stretch out payments, you need cash to keep your business afloat. The line of credit they maintain at their bank is the fastest and easiest way to obtain money immediately.
3. Debt Reduction
Banks want to lend to businesses that will pay them back. A major difference between personal and business lending is the aspect of personal liability. If a person owes money to their bank and defaults, the bank has options.
When a business defaults on a loan, their options are limited as banks are cautious. If your client suddenly needs to borrow money, it will likely happen at a time when things aren’t going well for the business.
If a bank has loaned money and the client made payments on time and paid the loan off, they are in a better position than a business that has borrowed larger amounts of money. Put another way, you have a track record. Cash flow forecasting can help anticipate when there will be a cash surplus, providing an opportunity to pay down debt.
4. Develop a Personal Relationship With a Lender
The world has changed. Banking is no longer only done by local bank branches. Large banks operate in multistate markets. Businesses can bypass banks entirely. Borrowing from Fintech lenders might not involve any person to person contact.
You want to have face to face relationships with lenders in your local market. Community banks can be more closely tied to the local area than multi state banks. They are usually run by people who live in the local area and belong to the chamber of commerce.
Because of these local connections, they have an interest in seeing local businesses succeed. As a business owner, you should get to know your bankers. Bring them to your business periodically. Let them see how your business works.
Better yet, have your client share their dreams for the future. Tell clients to try to get lenders emotionally invested in the success of the business. When they want to borrow money, they will already know the track record and how they intend to use the money. They tend to make faster decisions too.
5. Understand the Loan Programs Available
People often assume banks are the only source of credit. That’s often correct, but there are Federal and state agencies that exist to help small businesses secure financing.
At the Federal level, the Small Business Administration (SBA) partners with lenders, usually banks. Three types are: 7(A) loans, 505 loans, which are usually related to assets and microloans. The SBA’s idea of a microloan is $ 50,000 or less. States have their own programs too.
As an example, New York has its Empire State Development agency, focusing on businesses with under 100 employees. They even provide a checklist of programs available. You and your client should check out the programs available in your state and your client’s eligibility.
The common theme running through all five examples is the importance of acting, not reacting. Your business owning client needs to plan ahead. When they need money, the line of credit, personal relationships and banking history should all be in place. Cash flow forecasting is an essential component in the process.
|Accounting professionals that are looking to offer financing application support for small business clients are invited to download ForwardAI’s latest guide on How Lenders View Financing Applications. Learn how to review your clients’ General Ledger with the mindset of a lender and help them position their business for success. Download it here.|
Bryce Sanders is president of Perceptive Business Solutions Inc. in New Hope, Pennsylvania. He provides high-net-worth client acquisition training for the financial services industry. His book, Captivating the Wealthy Investor, can be found on Amazon.com.