8 Things To Remember About Seasonal Business Loans

November 2, 2022

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Many small businesses contend with distinct seasonality in which a furious peak season is followed by a dreary slow season. Some businesses peak in the summer months, some peak in the holiday season, and others peak in between. The United States Federal Reserve has shown that employment drops in January and February, particularly in retail and construction industries,

Those financial peaks and valleys can complicate things for business owners making plans. Fortunately, entrepreneurs can use seasonality to their advantage by keeping a few things in mind.

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Seasonal business financing is all about timing. Wise business owners start a loan application process when their businesses are at peak business. Many financing options take month-over-month revenue into account when deciding on the amount of money they’ll loan and associated interest rates.

On top of that, the last thing you want is to have to scramble to find a small business loan when you’re facing cash flow difficulties in your offseason. Desperation leads to compromise – high interest rates, insufficient loan amounts, and unfavorable repayment terms. 

It can feel daunting to add another thing to your company’s plate during the busy season. But choosing the right time to seek out a seasonal loan can save your company tons of money in the long term (and be less of a headache when it’s needed).

A revolving line of credit can provide insurance against unforeseen expenses year-round

There are two main forms of revolving lines of credit: business lines of credit and business credit cards. In both forms, a lender assigns the borrower a specific credit limit, and the borrower is free to draw on that line of credit up to the limit. You’ll only pay interest and make payments on what’s borrowed under the limit.

A revolving line of credit means that in both situations, once you make payments on the total you’ve borrowed, you can spend up to the limit again. You can make many purchases on the exact same business credit card or line of credit simply by paying down the balance again and again (which helps build your business credit score).

There are a few differences between a business line of credit and a business credit card. Lines of credit tend to be larger and can be drawn in a variety of ways, including direct deposit into a bank account, checks, or cards. Business credit cards sometimes have lower interest rates, but also lower credit limits. You can also use them to build rewards and points, just like you can with a personal credit card.

With a revolving line of credit, you’ve always got the funding you need in your back pocket. If an unexpected expense comes up during your offseason, you’ve got the cash you need. If something comes up during your peak season, you can draw on the line of credit then as well.

A merchant cash advance can help in the slow times

Merchant cash advances, or MCAs, are helpful to new businesses, businesses with bad credit, or businesses in a slow period. MCAs aren’t loans, and they’re not subject to the same laws and regulations that loans are. Instead, MCAs involve a company purchasing a portion of your company’s future debit and credit card sales. 

If you receive an MCA, you’ll repay it by giving the MCA provider a portion of each day’s debit and credit card sales, typically around 10%. MCAs come with a set-in-stone repayment total instead of an interest rate. That total is determined through a factor rate, which is multiplied by the size of the advance to find the repayment total.

MCAs can be helpful during the offseason for seasonal businesses because of that percentage-based repayment style. A loan with monthly payments doesn’t care if you’re a sunscreen manufacturer and it’s February, or if you operate snow plows and it’s mid-July. MCA payments, on the other hand, grow with sales. And payments stay small when sales are at their lowest.

One other benefit during the slow period: MCAs move very quickly. So when business expenses pop up that you weren’t expecting, an MCA can get it taken care of as soon as possible, even in the slow times.

Invoice factoring can provide a financial jolt in the slow season

Much like MCAs, invoice factoring is a transaction-based funding option in which a business in need of a cash infusion sells its accounts receivable. The factoring company pays a large percentage of that invoice total and then takes the payments in the company’s place. For example, if your company’s got $20,000 in accounts receivable, a factoring provider might offer you 95% of that total ($19,000) up front in exchange for the right to collect the full total.

For some seasonal companies, there can be a lag between invoices going out in the busy season and when they get paid. Using invoice factoring is a way to make sure that the cash keeps flowing and business needs are met.

You need to keep your team paid

Many seasonal business owners hire extra staff during the busy period in order to maximize sales and customer experience. The problem is, there are also plenty of team members who will be on the books year round, and you’ll need to ensure they’re paid during the offseason.

Many types of financing – from lines of credit to tradition loan options and more – can be used to meet payroll. If finances are looking tight when it’s time to pay the people who make your company work, you may want to consider leveraging your financing to keep them paid.

Loans can help you stock up after the busy season ends

The busy season has ended. Now what? Well, for one, by definition you’re probably low on inventory. Many small business owners use financing to refill their inventory once the busy period has ended.

Paired with the favorable terms likely available to business owners after their busy period ends, it’s a great time to refill the shelves or ramp up production if you operate a business that manufactures your product. The last thing you want is for customers to venture to your company during your fallow period and find that they can’t even buy that product they’ve been eying because your inventory was completely depleted at peak season.

They can boost working capital in the offseason

Working capital is defined as the difference between a company’s cash and easily-liquidated assets (inventory, accounts receivable, etc.) and its current debt obligations. Working capital is an easily-understandable way of measuring a company’s financial health. If you’ve got lots of working capital, you’ve got enough cash on hand to pay for most expenses that may pop up. If you’ve got low (or even negative) working capital, it may mean that your company will be unable to keep up with its bills. And if a new expense or opportunity should arrive at your doorstep, insufficient working capital means you won’t be able to make that payment or take advantage of that opportunity.

Many different seasonal business loans can function as working capital boosters: short-term traditional loans, lines of credit, even the transaction-based funding options that aren’t legally loans discussed above can work to bridge the gap between an insufficient level of working capital and the level of liquidity your company needs to function.

Fix, replace, or get new equipment with equipment financing

If your business depends on equipment working overtime to get you through your peak season, that equipment might be in just as rough of condition as you are when the slowdown comes. That’s why you should consider equipment financing as the busy season winds down.

In equipment financing, you’ll provide a down payment on the repair, replacement, rental, or purchase of a piece of equipment your business needs to function. The lender then provides financing for the remainder of the ticket price. The equipment is then held as collateral. If the borrower defaults on the loan, the lender will repossess the equipment and sell it, thereby protecting the lender from losing too much money.

For a seasonal business, that means you can make sure the equipment you need to operate in your peak is in ship shape after the rigors of the busy period. And the collateral requirement means interest rates are typically fairly low.

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