Geoff Arlott, a 53-year-old former Marine, runs a business making and selling Christmas crackers and gift items for various holidays. “When I started about eight years ago, people thought I was doomed to fail because of the seasonal nature of my business,” he says. While he admits that the going has sometimes been tough, with sales hitting rock bottom in some seasons, he has earned enough from his venture to expand it to cover non-Christian holidays and festivals as well, while expanding his modest workforce from five to 12 employees. And short-term loans for seasonal business have played a large part in his success.
When we say seasonal business, however, we ought to take into account that most businesses are affected by a rise and fall in trading volume. That is to say, sales and profits are not constant for any business. It is merely that a business based on seasonal activities will experience a sharper increase or decrease in sales at certain times of the year.
Paradoxically, most seasonal businesses have to take on larger volumes of outgo during the slack season. Kristy Rogers, a 37-year-old mother of two who launched a skiwear business nine years ago with her partner Stephen Howe, and who has about 30 seasonal and non-seasonal employees on the payroll, says it is not enough to ensure that the business is profitable for four months of the year and idle for the rest. “You need to stock up on raw material for the coming season, pay the staff, pay your suppliers, invest in R & D and maintenance, and I’m only talking fixed costs here,” she says. “So your receivables have to keep coming in throughout the year. And yes, short term seasonal business loans are a definite option.”
Of course, for those who fight shy of loans, bank overdrafts offer an alternative. Overdrafts can help you tide over a dull trading period, because they give you access to additional cash as and when required. Ergo, you can meet unforeseen and incidental costs that need to be settled promptly. However, since overdrafts can be expensive, seasonal business loans are a cheaper alternative. As Geoff says, “The added advantage here is that most banks offer flexible repayment schedules, so you can repay the loan when sales are high. I have routinely cleared my loan repayment over Christmas and New Year, and the banks have been very supportive.”
Like Geoff, Kristy would choose a short-term business loan over an overdraft because she feels overdraft repayment is an unstructured process that leaves you with no clear idea of when you need to repay your overdraft. “By contrast, for a seasonal business loan, you know you have a repayment schedule spread across six months or 12 months or whatever,” she explains. “As long you use it wisely, a seasonal business loan can solve many problems.”
Since most seasonal business loans are likely to be short-term, banks tend to treat them as lines of credit, offering the option of interest only, with the principal to be paid off at a specified time in the future — from 90 days to a year or more. Usually, the interest rates on these loans depend on the US Prime Rate or the London Interbank Offered Rate (LIBOR), and therefore rise or fall with these indices, though these fluctuations are obviously fewer over a shorter period. Even so, before you actually take out a loan, you should discuss it with a loan counselor or financial consultant and know all about interest rates, potential changes in monthly repayment amounts, the duration of the loan and other particulars.
“Above all else,” says Kristy, “make sure that you take out a seasonal business loan only when your cash flow projection tells you that it will contribute to an increase in revenue. If, however, you default on a loan at any time, your company’s credit rating will take a beating, and you will end up with a bad credit history.” And that means a problem arranging future funding.
Geoff suggests that the best short-term seasonal business loans are those that allow you an automatic extension of the repayment period when you partially repay the principal. “So if you’ve borrowed $50,000 on a 90-day deadline, repaying $10,000 at the end of 90 days ought to give you another 90 days to repay the full amount, with interest only payments continuing during the extension period, and so on,” he says. In other words, the payback should suit your terms.