4 ways a company can use loans to improve cash flows

Cash flows are the lifeblood of any company. Every business -- especially if it is small -- needs a regular inflow and outflow of money. This flow of cash can even determine the firm’s future. Only when a company has steady cash flows, can it afford to even pay its employees and keep the lights burning. And for this, a company has to build a cushion or fund of cash. This can help sustained growth. This, however, is easier said than done. It can be a huge task if the company is just starting out. Debt financing can help in this case. Unfortunately, not many companies realize how life-saving this can be in the initial growth period.Here’s how a small business company can utilize loans to increase cash flows.1) OverdraftOverdrafts come in very handy to manage gaps in cash flow that might arise due to a mismatch in timing. This generally occurs for companies that have cash flows moving in and out many times a month. In other words, imagine a company that manufactures paper. For some reason, the sales-related income gets delayed by one week. But the company has to pay for raw materials immediately to keep manufacturing. At such times, it is best to opt for an overdraft facility.It is quite easy to avail an overdraft from your banker since it does not take up too much time for processing. You can even increase the overdraft limit as the company grows. Of course, this depends on the company’s payment history and relationship with the bank.2) Working capital loansOften, a small business fails not because of lack of growth options. Rather, it is due to the firm’s inability to continue day-to-day operations smoothly. This is where working capital, the money required to take care of short-term needs, plays a role. When the working capital starts to dry up, companies tend to dig into the cash reserves to meet the financial requirements. This may seem like a good idea in the beginning. But over the course of time, it can make a huge dent in the firm’s piggy bank.To avoid such a situation, the firm can go for a working capital loan. It is a specialized loan offered by banks to small businesses to meet the company's everyday financial needs. These loans are helpful in the short term; they are disbursed quickly without needing collateral.3) Loan-on-purchase order Adequate cash flow is vital to sustain a company when it enters the big leagues. Take the paper company example again. Let us assume that the company has been doing quite well for some time. It has built up a steady clientele and delivers its products on time. Now imagine that the firm gets a huge purchase order from a client out of the blue. It would not be possible to fulfill the order without bringing on extra manpower and raw materials. The inability to finance these new requirements can hinder the company’s growth. In such cases, the company can use the sale order as collateral to obtain a loan. The bank would consider the loan based on the firm’s reputation and repayment history.4) Long-term financeYou can consider long-term finance to purchase assets instead of buying them outright with cash reserves or savings. For example, if your company requires a new transport truck, it is better to approach a bank for an auto loan. This way, you can create assets without putting an additional burden on your company. The reserves can be better employed in situations when cash flows are tight.The bottom lineDebt is not always a bad thing. In fact, most companies can fail without timely credit. A small loan can go a long way in ensuring a company's long-term sustainability.