This blog was written by Chinwe Onyeagoro, Co-Founder and CEO, FundWell
We all know the importance of health and wellness when it comes to our bodies and our minds. We take daily, monthly, and annual steps to ensure the prevention of major health issues and maintain a good quality of life. These ongoing actions include regular physician check-ups, regular exercise, taking vitamins and supplements, getting rest and relaxation, eating healthy, and reducing stress. We also know the risks associated with poor lifestyle choices and behavior, such as chronic conditions and increased healthcare costs.
The same focus should be applied to financial wellness for small businesses. We at FundWell believe that business owners should take a holistic and proactive approach to their financial wellness. This includes strategic and tactical steps to continually evaluate and improve four key financial indicators: cash flow, credit, customers, and collateral. We call these indicators the 4 C’s. We not only help our customers understand their loan eligibility and get matched to lenders, but we also provide financial wellness planning, advice, and tips to ensure they get the best funding options now and over time. For example, we recently helped Donna Tucker, owner of Chapter 2 bookstore in North Carolina, and she had this to say about her experience:
“Having talked with several bankers and alternative lenders, I can say that Fundwell is the only one who has been willing (and able) to help me work through a difficult situation. If a deal isn’t quick and easy, other lenders don’t want to be bothered. This is not the case with Fundwell because they are willing to tackle challenges. Their financial health tips and advice are excellent and worth more than the monthly cost to achieve long-term financial health.”
If you don’t pay attention to your financial wellness, it gets harder over time, and it takes longer to correct financial issues. You can risk overpaying on interest rates, damaging your personal credit score, unnecessarily depleting your personal savings, and missing out on new revenue and growth opportunities. Visit https://www.thefundwell.com/scorecard/ to get your online loan eligibility and learn how healthy your business is right now.
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Financial Indicators – The 4 C’s: Cash flow, Credit, Customers and Collateral
The 4 C’s are the key financial indicators that determine the state of your financial health. If you work to improve these areas on an ongoing basis, you will always be in good shape to access more and better funding.
Depending on the funding product, some lenders may care more about certain indicators than others. For example, in the case of merchant cash advance providers, they care a lot about your credit card-driven revenue. Asset-based lenders care about your fixed (e.g., property and equipment), and liquid (e.g., purchase orders, receivables, and stock) asset value.
You should create a financial wellness dashboard, which provides a snapshot of how you are doing in each of these critical areas, and outlines personalized improvement plan steps and targets. This should be reviewed on a regular basis. See an example of FundWell’s Financial Wellness Plan.
Cash flow – This is the most important indicator because it determines your ability to keep operating your business. Growing too fast and not managing expenses can be just as dangerous as declining revenues. Consider how you can stage your growth in order to manage expenses while keeping more of your dollars in the business. Lenders want to see that your business has taxable income, which is an indicator that you have the cash flow necessary to service debt.
Timing: Track cash flow weekly using your accounting system and make sure your accounting system is integrated with your bank account. That way you will always have an accurate reflection of how much money you have in the business.
Credit – It is important to manage both personal and business credit. The top tips to keep in mind in the area of credit are: 1) pay on time, 2) make sure your debt-to-credit ratio is 25% or lower, and 3) ensure you have enough income to cover existing loans and liabilities. By vigilantly making payments and keeping your balance in check, your personal credit score will stay at an attractive level. If your credit history has been tarnished, it is important to address or be able to explain these blemishes. Work at establishing and protecting your business credit. It is less regulated than personal credit, so you must be even more careful when it comes to monitoring your business credit activity.
Always do a cost/benefit analysis when making large purchases. For example, determine if expensive equipment is a critical requirement for growth, and assess whether it will generate incremental sales or save your business enough money to justify the purchase. This is especially important in the early stages of your business. If you wait to incur large expenses until your business sales activity increases, you will be in a much better position to obtain larger loans at more competitive interest rates.
When seeking working capital or bridge funding, be sure to only take out loans that can be used to bring in committed sales or have a high likelihood of being generated. Working capital funding is really supposed to be used to fuel existing operations. It shouldn’t be spent on uncertain, “blue sky” or high risk business development and expansion efforts because if those investments don’t bear fruit in a timely manner, you won’t have the credit that you need to cover cash flow deficits and sustain your day-to-day business.
Timing: Your total credit exposure, financing costs, and future needs should be reviewed during your month-end reconciliation process and considered any time prior to taking on new debt.
Customers – Customer-focused key pointers are 1) diversify your customer base and 2) ensure your revenue flows evenly and consistently throughout the year. Typically, a business should not have more than 25% of its revenue coming from any single customer or contract. It is important to note this maximum customer/contract concentration threshold often varies by industry. Customer diversity gives lenders a comfort level that you will be able to repay a loan regardless of seasonality, industry volatility, and unexpected shifts in customer spending priorities.
It should also be easy for customers to make repeat purchases—this is typical with lower cost, higher volume products/services. This may mean offering credit card processing options or a new subscription business model. Lenders like to see repeat customer activity, which is typically associated with more profitable sales, because you are spending little to nothing to retain that business. This also results in more predictable revenues.
Turnaround time on accounts receivables is also something lenders look at closely. It is key to bill and get paid as quickly as possible. Ways to ensure a short sales cycle include accepting credit card, PayPal, or merchant account payments; selling through channels that take immediate payment and pay you quickly such as Amazon and eBay; and negotiating shorter payment terms with customers. Also be diligent in your accounts receivables (A/R) management processes. Utilize a software tool with billing and accounting alerts, notifications, and reminders for you and your clients.
Finally, the quality of your customers can also be an advantage. Some institutions will lend based on the quality and credit of your customers and your longevity in serving them. In some cases, lenders may want to see a copy of contracts or your accounts receivables history with those customers.
Timing: Revenue, A/R, and collections should be tracked daily, weekly, and/or monthly depending on your type of business and A/R turnaround. For example, most retailers/e-commerce companies look at numbers daily, whereas professional services firms may review revenue monthly. The more often you look at your numbers the faster you can deal with any issues. You can review your client mix on a quarterly basis to uncover opportunities for diversification, new channels, or target markets.
Collateral – Generally, the more assets you have, the more comfortable a lender is with lending you money. It is good to have both fixed assets and liquid assets. Make sure you include all long-term business assets on your company’s financials. If you have personal assets that you will be using as business collateral, consider transferring that property to the business. If you have to personally guarantee a loan, your home, mutual funds and stocks are good personal assets, while equipment, real estate, and accounts receivable are good business assets. It is also a good practice to do a cost/benefit analysis when deciding to buy or lease any fixed asset over $3,000 and evaluate how it will impact your business balance sheet.
Timing: Assets can be reviewed quarterly, unless there is milestone basis for considering more frequently, such as additional space needed for a new store opening.
By focusing on the 4 C’s, any small business can put strategic and tactical actions in place to improve its financial health in the short term and over time. The healthier your business the more eligible you will be to access more debt capital at lower interest rates. Visit www.thefundwell.com for more information.
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Free 90-Day Trial Offer of FundWell’s Financial Wellness Program
Get a 90-Day Free Trial of FundWell’s Financial Wellness Program. We’ll help you assess your financial health and put a plan in place to improve your 4 C’s. This will enable you to access more loan money at a lower interest rate. There is no obligation to continue after 90 days. E-mail us to learn more and get started at: info@thefundwell.com
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FundWell is a small business loan matching and financial wellness site that helps borrowers get the best loan they are eligible for today and improves their eligibility for more capital at lower interest rates in the future. FundWell provides borrowers with up to three lender matches for free through our national network of lenders that provide 11 different types of loan products for amounts from $500 to $2 million dollars. FundWell provides education, transparency, and assistance to help borrowers apply for loans and improve their financial health over time. Visit www.thefundwell.com to learn more and to get your loan eligibility.