Get Funded! | Your Business Cash Flow

By: Ervin Hughes, Jr.

Managing Director at Rainstar Capital Group | President at Dominion Capital Management

Step #3 Your Business Cash Flow.

Did you know that a business bank loan is 3 times more likely to be declined even if you have cash in the bank, good personal credit, and in some cases, even collateral to secure the loan, still may not help you get funding approved? Why? It’s because of your business cash flow. Cash flow is the number one “deal killer” for small business loans. Even if you’ve been previously declined for a bank loan, there are alternative lenders who can loan you money but they too will pay very close attention to your company’s cash flow. Measuring your cash flow is important to determine how much debt your business cash flow can support.

In Business Finance the Facts Don’t Count
For business owners looking to get funded, remember this. “In business finance, the facts don’t count.” “All that counts is what you can prove…” The fact is that there are many small businesses that are great at earning money. The ability to earn money is a fact, but what counts is what can be proven.

A Business Story
Some time ago there was a local business owner who was living the good life. Clearly, the owner was making a good income from the business. Soon the time came for the company to expand and the owner wanted to finance the new growth. The owner always said, “cash is king” so the retail establishment had many cash-paying customers, but the owner would often just put the days cash in his pocket instead of the bank and rarely accounted for the income on any accounting system. The owner even had good personal credit and collateral, but the company was immediately declined by the bank because there was no way to prove that the business had enough cash flow to pay back the loan. So, it may be a fact that the business does have cash flow, but the facts don’t count. All that counts is what you can prove.

Measuring Your Company’s Cash Flow
Measuring your cash flow is important to determine how much debt your business cash flow can support. This is called your Debt Service Coverage Ratio or DSCR. More on this in a moment-but read on. As a business owner, it’s important to understand that the bank really does want to loan money. It’s the business they’re in, but banks are not in the business of loaning money to a business that cannot demonstrate how it will be able to pay the loan back on time. Most traditional lenders will agree that cash flow is at the head of the list when it comes to reasons why a loan is declined.

What is Debt Service Coverage Ratio?
When you apply for business loans, lenders use a variety of quantitative and qualitative metrics to assess your eligibility. Among these metrics, DSCR is one of the most important because it goes to the heart of the question that every lender tries to answer: Can you pay back this loan on time and in full? Your business’s DSCR helps the lender determine whether your business can take on the small business loan, how large a loan to approve, and what terms you’ll get on the financing. Most lenders will use a minimum benchmark or DSCR ratio of 1.25x and higher as a qualifying measurement for loan approval. So how much in Net Operating Income do you need to get a loan and meet a 1.25x DSCR? Use this quick and easy link to calculate your own DSCR.

How to Increase Your DSCR
Before you start looking to get financing for your business from a bank, do a self-assessment of your company’s DSCR. To help you get started here’s are (4) things that you can do to help increase your DSCR before you start applying for a bank loan.
1. Increase your net operating income.
2. Decrease your operating expenses.
3. Pay off some of your existing debt.
4. Decrease your borrowing amount.

What’s the Goal?
Put your money in the bank. Be diligent about your bookkeeping or at least get help. Be prepared to provide bank and financial statements to prospective lenders to prove that your business has enough cash flow to support new debt.

Want to Learn More?
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