6 Best Ways To Finance Your Seasonal Business

Businesses with seasonal revenue inflows, such as Christmas decoration shops or ski lodges or ice-cream shops, or even tax preparation offices, would only have such seasonal revenue. Consequently, they may have difficulty meeting their fixed costs during the off-season, which requires serious business and financial planning.

The revenue of a seasonal business varies greatly from season to season. In slow-selling months, it might be hard to pay expenses. However, expenses are mandatory to operate and grow a business. Therefore, seasonal businesses need to manage their cash flow effectively.

It has been evidenced in a considerable amount of research how firms’ long-term financial policies, such as leverage, cash holdings, and dividend payouts based on the firm’s growth opportunities, are affected by investment needs. In contrast, there is little evidence on how businesses manage their short-term borrowing needs. Short-term borrowing is more important for seasonal businesses. Managers of seasonal operations must decide whether to use temporary or permanent financing to meet seasonal fund requirements.

Often, seasonal businesses have a difficult time securing financing. You will need upfront cash before the busy season, and afterward, you will need ongoing cash to cover mid-season expenses. The resulting obstacles make it difficult for seasonal businesses to rely entirely on sales to sustain operations.

However, it is possible to finance a seasonal project. Small and medium enterprise owners can maximise their profits with the right seasonal business financing methods during the busy season. Planning ahead of time and applying for funding can be very beneficial for seasonal business owners.

The main focus here is to provide you with the best possible ways to finance your seasonal business, along with listing the benefits of the seasonal funding for your business.

How Seasonal Funding Can Benefit Your Business?

Upgrading the equipment

Approximately 38% of the business owners reported spending on new equipment, according to the NFIB Research Foundation’s Small Business Optimism Index, which was conducted in September 2019 (see here).
In the fourth quarter, many businesses see their sales increase, making it a good time to buy new equipment. However, a seasonal business owner must first determine whether new equipment will enable the business to remain competitive. If so, a seasonal business loan/equipment loan can maximize the cash flow and offer significant tax advantages at the same time.

Purchase the company vehicle

Buying company vehicles at the end of the year is the best time because many dealerships are trying to offload old models and make room for new ones.

Therefore, seasonal financing can help you get the business vehicle you need. The recent, above-mentioned optimism index data also shows that 23% of business owners have purchased corporate vehicles within the last three months of 2019.

Inventory

At the end of the year, your inventory requirements may change. For example, you may launch a new product line or design a new collection for the season. Thus, you can fund holiday inventories using seasonal business loans.

This will also benefit vendors, as it is most likely that business owners will consider purchasing products from vendors that typically perform well in the fourth quarter.

The Payroll

Paying your employees overtime or giving them the required bonuses is another way to use the seasonal business financing. During the holiday season, companies hire extra employees to help them prepare for the upcoming year and help them with sales.

Marketing campaigns

Through targeted advertising campaigns, seasonal business owners can generate awareness about their business before and during peak season, using seasonal financing.

Best Ways To Finance Your Seasonal Business

Short -Term Loan/Seasonal Loan

The concept of seasonal business loans, also called short-term loans, is designed to help seasonal businesses with their short-term funding needs. The cash flow of your seasonal business can be managed and forecast in high- and low-sale months thanks to such a seasonal business loan. Additionally, short-term loans can be utilised to cover unexpected expenses or can expand the seasonal business effectively.

When you use a short-term loan, you will not be required to reduce the business expenses. It is beneficial if you are already on a budget and not in your busy season.

Almost any business expense can be financed with a short-term loan, including payroll, equipment, marketing, and inventory. A short-term loan can also help you get an important piece of equipment or a large amount of inventory.

Flexi Loans

Several banks and non-banking financial companies (NBFCs) offer Flexi loans up to 35 lakhs from which a person can withdraw money in pieces based on their needs. An interest rate for a business loan will only be charged on the amount borrowed, not on the entire amount approved. For example, in the case of a loan amount of Rs. 35 lakh and a borrowed amount of Rs. 4 lakh, interest will only be charged on the Rs. 4 lakh borrowed, not the entire Rs. 25 lakh.

A flexible repayment option is also provided, permitting prepayment of the loan at any time without incurring additional charges. Alternatively, you can pay only the interest as EMI and pay the principal at the end of the term. Such loans are also unsecured. Thus, you don’t need to offer collateral to obtain these loans.

Seasonal business owners who need to finance their operations during the off-season can take advantage of these features. The whole amount may not be needed at once, so you can borrow what you need and pay interest only on that amount.

Business Line Of Credit

Businesses can benefit significantly from a ‘business line of credit’ when securing funding strategically and thoughtfully. Capitalizing on opportunities and meeting other short-term capital requirements while accessing a credit line can help your business succeed.

A business credit line may be beneficial if your revenue is erratic. It works similarly to a credit card, thereby allowing you to borrow up to a predetermined limit.

If you’re unsure how much additional capital you’ll need, you can save money by taking out a business line of credit. You will not obtain more than you need and will have to repay all added interest.

The money can be used on a need-to-basis or saved up as an emergency fund. Seasonal businesses need a line of credit more than others, and it is particularly crucial for them.

Businesses use business lines of credit as revolving loans to borrow a fixed amount of capital at any time for short-term business needs. Examples of this include:

• Acquiring inventory
• Repairing mission-critical machinery
• Investing in a marketing campaign
• Bridging a seasonal cash flow shortfall, etc.

Merchant Cash Advance

Businesses with erratic revenues and poor credit can benefit from merchant cash advances (MCAs). With MCA, you get the speed, simplicity, and flexibility you require, with a percentage of your daily revenue allocated to remittance. In addition, it offers broad usage and obligations linked to future credit card and debit card sales.

As a type of business finance, an MCA or business cash advance involves giving a company a lump sum amount in exchange for a percentage of future revenue. Micro, small and medium enterprises (MSME) or small business owners who need flexible funding options to deal with fluctuating revenue can take advantage of merchant cash advances, typically have shorter terms and smaller regular payments than business term loans.

MCAs have a different remittance process than short-term loans. You do not need to pay a fixed rate each month because they are calculated monthly based on your daily receipts. As a result, your remittances will be lowered if you are slow and higher if you are busy.

Accounts Receivable Financing

An ‘accounts receivable financing’ is a form of asset-based financing that allows business owners to access capital secured by outstanding invoices. If you use accounts receivable financing, you will receive up to 100% of the value of an outstanding invoice; however, they will charge you a fee depending on how long it takes for the customer to pay.

Even though accounts receivable financing is not a business loan, the structure is similar. The only issue is that unpaid invoices serve as collateral, so extra security is not required.

Accounts receivable financing could be the answer to turning a good company into a great one when the seasonal business is dealing with erratic cash flow or increased cash needs due to seasonal changes or business growth.

Business Credit Card

You may want to consider a business credit card if you own a startup business or a new business. It is possible to be approved even if you do not have much credit history. Using it and making your payments on time will build your business credit score and allow you to qualify for other financing options.

Most business credit cards come with rewards programs as well. Cashback, gift cards, or travel points may be offered by the business credit, depending on the business credit card you choose.

Conclusion

Seasonal financing needs can be either long-term or short-term, depending on which a seasonal business raises finances.

For example, if we consider a seasonal business having seasonal consumer demand that experiences an increase in short-term expenditures (e.g. inventory, wages, advertising, equipment improvements, etc.) before the seasonal increases in business operations and is raising long-term capital. It is feasible for such a seasonal firm to raise or retain sufficient long-term capital to meet these seasonal financing needs during the peak period. After raising funds, the management can then use a portion of the funds for short-term financing needs when they are high and accrue reserves as excess cash in subsequent periods. This is known as the recurring approach.

In contrast, managers at the other end of the spectrum may not have any alternative but to rely entirely on short-term financing. They might, for instance, find their way to private debt markets. As a result of this scenario, debt balances increase when financing needs are high and drop when funds are received. To finance short-term needs, this method is called transitory.

The peak season always seems far away to small business owners anticipating the long days and busy hours. If you have the right funding in place, you will be better prepared to overcome obstacles and improve your seasonal business.