Knowing basic accounting terminology will help you efficiently manage your cash flow and make you aware of when you won’t have enough and will need to find it elsewhere.
The problem is that small businesses are often by newer owners who don’t always realize they are in trouble until too late. Small businesses also face the challenges of not being very attractive to traditional lenders, like banks. They don’t want to take a risk on businesses, especially those in high-risk industries, because they have no collateral and nonexistent or poor credit.
But, by knowing when you may be facing a cashflow problems, you will know when it’s time to seek out high-risk business loans.
What Are High-Risk Business Loans?
Businesses classified by banks as high-risk or those with no credit need to apply for high-risk business loans with alternative lenders. Online, non-bank lenders, often referred to as microlenders, often lend these types of businesses smaller amounts money – often less than $25,000 – for shorter terms. One of the positives of taking out one of the these types of loans is that you are building credit as you pay the fund back on time.
Now, that you understand high-risk business loans, it’s time to understand some terms that are sure signs you should consider applying for them.
Know Your Burn Rate Before It Burns You
A burn rate is quite simple. It helps you approximate about how much you spend each month. Here’s an example, if in January you had a business bank balance of $15,000, and then by the end of the quarter, you had $6,000, this means you spent $9,000 in three months. With this example, your burn rate is $3,000 per month. To figure out a burn rate, take the total amount spent and divide it by the period of time, which in this case was three months. So, $9,000 divided by three equals $3,000.
Ideally, you want a negative burn rate, meaning you want to have more money in your bank account than when you started. If your business isn’t there, it’s vital you know your burn rate, so you can make your expenses and determine whether you have extra cash to invest in new employees or products.
It’s Ok, Draw, But Know What It Means
Draws and distributions may not be terms you don’t know very well, but you better get to know them. Small business owners often aren’t on their company’s payroll. Instead, they pay themselves via draws and distributions. This is completely fine except these payments show up on statement as a loss in the equity of the business, which is your ownership in the business.
Though it’s not rare for small businesses to have negative equity, it’s critical that you pay attention to it because it means you are carrying too much debt, are taking too many draws, or what you are selling isn’t profitable. All of these are an issue that businesses should try to get a handle on sooner or later.
Know Your Worth – Pay Attention to Liabilities
Credit card debt, sales and payroll taxes, and loans are liabilities. The thing to remember is that liabilities are listed on your balance sheet not your profit and loss statement. Many businesses have liabilities and they aren’t detrimental to a company, but that’s as long as your assets are higher than them. If your liabilities are higher than your assets, it may be time to rethink your business strategy or seek alternative funding to consolidate your liabilities.
The Final Thought
Knowing when it’s time to go after high-risk business loans is something many merchants don’t know they need to do until it’s too late. Understanding basic accounting terms and signs of trouble can help you better prepare you when you need to apply for financing.
Small businesses that need high-risk business loans should considering applying to First American Merchant (FAM), which offers financing solutions to all types of businesses. It offers an easy online application and solutions are catered to each business’ needs.