Banking options for seasonal business owners
How can I best support an ongoing cash flow during slower months without laying off my employees?
Generally, the three best ways to help the cash flow during slow months for a seasonal business would be to either take out a line of credit, set up deferred payments, or use a seasonal loan.
What is the difference between these three options?
Deferred Payment – The easiest way to think of this is like a credit card payment or in-store financing. For example, you don’t have the money to buy a new computer, but the store offers 6 months of deferred payments, so the full amount is paid over the next 6 months versus paying the full amount up front. This would be similar to having a lower cash flow in the winter months, so you take one (or a few) of your bills and set up payments for future months.
Line of Credit – A line of credit (LOC) is opening a loan for a set amount. This loan stays open for use as needed. For example, you take out a LOC for $1M. In December, you need $150K to pay payroll for the month, so you can draw from the LOC. That amount would need to be paid back over the next few months (as scheduled with your banking institution), which would bring your available amount back to $1M.
Seasonal Loan – This is a regular loan, but the payment structure is set up differently from your typical loan. During the busier months, the loan payments will be higher. During the slower months, the payments are lowered to an amount that can be supported by the cash flow at that time.
Does my business qualify for a line of credit?
A Line of credit is offered to several business industries, so this will not solely depend on the provability of seasonality in your business. They will look at the trends of the business – revenue, longevity, financial ratios, collateral, etc. In the way of approval, it is very similar to getting any other type of business loan.
Does my business qualify for a seasonal loan?
This will depend on your business and the banking institution you use. However, you would generally need to be able to prove a recurring seasonal need for additional funds, lasting longer than one month. Requirements to qualify will vary depending on the bank.
Does my business qualify for a deferred payment?
This again will depend on your business and who you work with. Generally, you will not need proof of financial struggle during certain times of the year. Some banks with work with you to make sure you have deferred payments during specific times of the year.
How do I apply for either a seasonal loan or line of credit?
To apply for either a seasonal loan or line of credit, you will need to reach out and work with your banking institution. Most banks will offer these options. If yours does not, your banker will likely be able to point you in the right direction.