Loan Basics
Loans can be secured or unsecured.

Secured loans require some form of collateral as an assurance that you will repay the loan. If you default on the loan, the lender has the right to seize your collateral.

The collateral is often connected to the purpose of the loan. For instance, if the loan you are seeking is to buy a photocopier, the photocopier itself serves as collateral.

Unsecured loans do not require any collateral. Instead, lenders evaluate your credit reputation. Unsecured loans are rare unless you've done a tremendous amount of business with the financial institution and your business has fared better than expected.

Secured loans usually have lower interest rates than unsecured loans. The collateral is usually related to the purpose of the loan; for instance, if you are borrowing to buy a printing press, the press itself will likely serve as collateral. Receivables and inventory may be used as collateral for small businesses financing growth.

In addition to being secured or unsecured, loans are also categorized by their repayment terms:

• Short-term loans are repaid within six to 18 months.
• Intermediate-term loans are repaid within three years.
• Long-term loans are repaid between three and 10 years, though some run for as long as 20 years.

Your banker will evaluate several factors in considering your loan application. These include:

• Character. Lenders look closely at how you’ve managed other loans (both personal and business) as well as your integrity and management experience.
• Credit capacity.  This includes a detailed review of financial statements and personal finances to assess your ability to repay.
• Collateral. The assets used as security for your loan should typically be larger than the amount you're borrowing.
• Capital. Banks like to lend to people who have money. They want to see alternative sources of repayment.
• Comfort/confidence with the business plan. Expect the bank to make a detailed judgment on whether your request fits a legitimate business purpose and that the terms of the loan make sense to them.

Points to Consider When Deciding Whether You Really Need a Loan

• Be sure you’re lacking capital and not good cash-flow management practices.
• Determine the specific purpose for the loan, and be prepared to discuss in detail how the money will be used.
• Be aware that the outlook on the future of your industry can make a difference in how favorably your loan proposal is viewed.
• Make sure your business plan is up to date and the loan you seek is reflected in the plan since lenders will want to review the plan.

Cash Flow
More businesses fail for lack of cash flow than for lack of profits. Therefore, understanding where your cash is coming from and going to is a critical part of smart business management.

• Cash flow basics
• Tips for improving cash flow
• Potential risks that can decrease cash flow
  
  

Basics of Cash Flow
At a basic level, cash flow means maximizing cash inflows while controlling cash outflows.

Cash flows in through:

• Sales of product or service
• Loan or credit card proceeds
• Asset sales
• Owner investments

Cash flows out through:

• Business expenditures
• Loan or credit card principal payments
• Asset purchases
• Owner withdrawals

 Cash flow comprises more than just profit and loss. It also is affected by:

• Accounts receivable
• Inventory
• Accounts payable
• Capital expenditures
• Borrowings and debt service
• Other "timing" differences

Inflows and outflows can be categorized into three main business parts:

• Operating (includes sales and business expenditures)
• Investing (includes asset sales and purchases)
• Financing (includes loans payments and proceeds, and owner investments and withdrawals)

Most of your cash flow should come from operating activities, since generating sales is critical for the long-term success of your business. Investing and financing are supplemental activities.

A cash flow statement simply takes into account all your business inflows and subtracts your cash outflows to equal the net change in your cash for any given time period. 

Tips for Improving Cash Flow

• Have a collection process in place
• Be diligent in collecting
• Require a down payment (a percentage of the fee up front)
• Define your terms to require payment in full upon completion
• Set up a line of credit that can help you cover a short-term lapse in cash flow (lenders rates are often less than the late fees your vendors charge)
• Weigh whether you should use a factoring service, which allows you to sell your receivables and get cash now instead of waiting 30 or 60 days

Potential Risks That Can Decrease Cash Flow
Unexpected occurrences can have a substantial impact on cash flow. Following is a list of threats that can easily bring additional expenses that increase cash outflow to small businesses: