What happens if your startup gets the funds it needs today, but cash flow issues mean the repayment of the financing starts before new sales? This is the financing problem that many young businesses fail to address. While both startup business loans and Small business cash advance financing can put capital into a business, they can behave very differently after the funding. A business owner most likely needs capital to fund inventory, cover employee payroll, buy software, marketing, equipment, or to finance a first major sales contract. The question a business owner should ask is not if financing will be approved. The question is whether the financing will give the company the runway to turn it into a revenue-generating asset.

What Startup Businesses Typically Need Funding For

Most new businesses require funding for many different reasons. A product business must order inventory to fulfill sales in the next cycle. A service business must hire employees before starting a client project. An online business may need to buy packaging, advertising, pay for software, and rent storage or expand its fulfillment center. Each of these may be needed simultaneously. The most important part may be the financing, not the approval of the loan

It is often hard for new businesses to get funding because many traditional lending institutions require proof of tax returns, financial statements, bank statements, and a solid business plan. An SBA loan or other small business loan will often require a personal guarantee along with evidence that the business may likely generate sufficient cash flow to pay back the loan. An SBA loan usually requires some semblance of lending underwriting.

The U.S. Small Business Administration does offer working capital loans that may meet the funding needs of your start-up. While it may be a good option, you still may be required to provide a personal guarantee. The process for an SBA-backed loan is lengthy and may appear more complex than other traditional funding options, but choosing to apply for funding should be an important part of your business plan.

Why New Businesses Consider Cash Advances

When time is of the essence due to high business demand, the importance of structure is compromised by the necessity of high speed. With month-end payroll, supplier demands, and competitive marketplace forces, an owner might choose to seek funding for Merchant Cash Advances (MCAs), since the application process focuses more on recent sales and deposits, as opposed to lengthy banking history and lending criteria.

With MCAs, numerous short-term high fees get paid back rapidly by automatic business account withdrawals, which most seed-stage startups lack the “predictable revenue” to endure. Therefore, MCAs may seem like a financially viable option for new businesses with revenue, but not enough to meet traditional bank loans. The FTC describes MCAs as a higher-cost, more aggressive, small business financing option.

For a startup, frequent shotgun collections will cannibalize cash flow. The money comes in, but businesses are built on predictable, reliable cash flow. So the payment may be easy one week, while it may be difficult the next with poor sales.

Startup Loans vs. Cash Advances: Protect the Runway

The startup’s most limited resource isn’t profit, but time. Runway is how long the company can operate without new funding. The purpose of the financing should be to either extend the runway or help the company progress to the next level of revenue. Financing may temporarily resolve the problem, but may be creating a problem for next month if the financing shortens the runway and the investment takes longer to create sales.

Startup business loans come with a defined amount, term, and payment. The length of the term can affect the investment, and the cost will spread over the predicted benefit of the company. This type of financing is often used for purchasing equipment, expanding the business to new locations, and even financing inventory.

A Small business cash advance is different from other financing. The business receives cash and will have a cash advance that will need to be repaid. Collections will begin quickly and will occur on a daily or weekly basis. The factor or financing cost will need to be weighed against the net amount received, total cash advanced, and estimated payback period, and a true APR or annualized cost should be used for comparison where available.

The question should be more about the impact financing will have after six months on a business than which one approved a loan the quickest. If a startup has a strong product, it can still fail if full commitments on incoming revenue take away all cash for rent, payroll, supplies, and taxes.

What Startups Should Evaluate Before Borrowing

Create a conservative cash flow projection before seeking financing. Use an average month to prepare. Include expenses like anticipated hiring and purchasing needs like inventory and software. Include planned taxes, owner draws, and anticipated financing payments. Reduce your sales projection by 10% to 15% and evaluate if the business would still be viable.

Founders should determine if the business would be viable if a customer takes longer to pay, if advertising costs increase, if inventory takes longer to sell, or if the launch of a new product is delayed. If financing is only viable with everything going right, then the proposed payment is likely aggressive.

Seek financing only if the company does not already have significant cash needs in the near future. Young companies often run into cash flow problems because the first payment on a new debt obligation leaves the company with insufficient cash to fund the next need. At Money Man 4 Business, we focus on restructuring and consolidating high-cost business debt if a qualifying program is available. The goal is to switch a high burden of repeated, frequent obligations to a more manageable structure instead of adding a payment to the cash flow limitation.

Money Man 4 Business indicates that qualifying consolidation structures can reduce interest and fees by two-thirds, or more, compared to high-cost debt that is being replaced. The actual savings will depend on the agreements currently in place and the terms of the financing, and they should always be compared side by side.

Advantages of Predictable Monthly Payments

For many founders, knowing the value of startup business loan monthly payments is most valuable for predictable budgeting. These payments make budgeting for payroll, rent, software, taxes, and supplier payments easier. An owner knows when the payment is expected and can time sales and funding accordingly.

Money Man 4 Business offers multiple financing options including term loans, SBA loans, working capital financing, lines of credit, equipment financing, and debt consolidation. Certain term loan programs can range from 1 to 25 years, depending on underwriting and financing availability. This financing range gives the business more flexibility to match the financing term to the longer duration capital financing purposes.

The financing company says clients can collaborate with a highly experienced CFO. For a new business, this can be important because the concern is often beyond just “How much can we borrow?” The founder often must decide how much ought to be financed, whether existing financing should be refinanced, how much the business can afford to pay, and what payment would allow the business to grow.

Frequently Asked Questions

What can startup financing be used for?
Depending on the product and lender, financing may support working capital, inventory, equipment, marketing, hiring, expansion, supplies, or other eligible business needs.

Can a new business qualify for financing without years of history?
Possibly. Requirements vary. Some lenders focus more heavily on owner credit, current revenue, deposits, collateral, projections, or industry experience when the business has a shorter operating history.

Should a startup Apply for MCA financing just because it is faster?
Not automatically. Speed can be useful, but the owner should compare the total cost, payment frequency, cash-flow impact, and the amount of runway remaining after the financing begins.

Finance the Growth, Not Just the Emergency

A startup runs on the assumption that capital will be available to support the essential systems until the business has gained enough market recognition to support growth. A good startup financing system simplifies the inventory purchase, customer service, staffing, and buying of productive assets. This should not require the business owner to play the dreaded cash flow funnel game every week.

Look at all aspects of startup business loans, startup business loan monthly payments, and any Small business cash advance. Use the balance in the cash flow funnel that is left after a payment. Money Man 4 Business helps business owners compare financing programs and longer-term, monthly payment structures and consolidation, so the business can fund its growth without compromising cash flow.