When businesses look to expand their business, they often turn to lenders to secure the necessary funds. During the loan application, small business owners will be required to provide a variety of information, including financial statements and a comprehensive business plan. Lenders want to see the free cash flow of your business to ensure the owner will be able to pay back the debt comfortably.
You don’t know how to calculate free cash flow? Don’t worry. This article will help you through the basics. The more organized your financial statements, the easier it is for any lender to understand your free cash flow, and therefore grant you a loan.
Understanding how to calculate free cash flow may seem a bit difficult at first. Yet it’s relatively easy to obtain. Every business owner should know the basic free cash flow formula.
What Is Free Cash Flow?
Free cash flow (FCF) looks at how much cash your business generates from sales, once you subtract out any outgoing payments for expenses (excluding taxes and interest). Lenders often look at free cash flow because if a business runs out of cash, they cannot pay their bills.
Imagine for a moment that you have a business checking account, and that account is the only place where you transact funds for your business. If you looked at the account on the 1st of January in one year, and then look at it again a year later, the change in balance is your free cash flow.
While this oversimplifies the actual measurement, it provides an excellent guide to understand how free cash flow works.
Free Cash Flow vs Operating Cash Flow
The main difference between free cash flow and operating cash flow is whether you include capital expenditures. Free cash flow always includes capital expenditures on the plant, equipment, etc. Operating cash flow excludes these items.
- Operating cash flow gives you a good picture of how your business generates cash from operations.
- Free cash flow tells you how much cash you have at the end of the day after everything is done for the business.
When you look for loans to buy equipment or expand your facilities, you’re looking at free cash flow. Why?
Because you’re looking at capital expenditures.
If you’re looking for loans to increase hiring, you want to look at both free cash flow and operating cash flow. Why?
Because labor is part of your ongoing operations. That’s why it’s crucial to understand how to calculate free cash flow. Otherwise, you may borrow too much or too little.
How Do You Calculate Free Cash Flow? – Use the Free Cash Flow Formula
What is the formula to calculate Free Cash Flow?
FCF = Cash from Operations – Capital Expenditures
This a breakdown of the FCF formula below:
FCF = Net Income + Non-Cash Expenses – Increase in Working Capital – Capital Expenditures
4 Steps to Calculate Free Cash Flow
Once you understand how to calculate free cash flow, you’ll be able to have the tools to apply for loans. The basic steps for the free cash flow formula:
- Add up your revenues you received payment on (nothing that still has to be paid)
- Subtract any expenses you paid cash for
- Subtract any payments for interest on loans and taxes
- Subtract any purchases you made on equipment or other large purchases you plan to depreciate
The other way you can calculate cash flow is by taking your net profit and adding back in non-cash items like depreciation or changes in inventory value. Then follow steps 3 & 4. In a nutshell, you’re trying to just look at the net movement of cash in and out for your business.
Once you understand how to calculate your free cash flow, you can check out this other article to guide you through setting up a free cash flow statement.
How do you calculate cash flow? – Other scenarios
How do you calculate cash flow from operations?
Cash Flow from Operations = Net income + non-cash items + adjustments for changes in working capital
How do you calculate the net cash flow?
Net Cash Flow = Operating cash flow + Invested cash flow + Financing cash flow
How do you calculate real estate cash flow?
Real Estate Cash Flow = Rent income – Vacancy loss – Expenses
COVID-19 and Cashflow
The current COVID-19 crisis is affecting business owners in unexpected ways. Some have seen their sales decline, many have been forced to temporarily close, which is wreaking havoc to their bottom lines.
As a business owner, you might be having some cash flow issues. But don’t worry, the future is not as grim as it may sound: this won’t last forever, and there are still some things you can do to ensure your business weathers the storm.
We recommend doing some, if not all, of these things:
- Apply for government aid, as it will help your business stay strong.
- Talk to your clients and suppliers to create new payment terms and payment facilities.
- Find new channels to sell your products and services. Right now, the internet is your best friend.
- Talk to your accountant; they might know of specific things you can do to help your business.
- Get external financing.
One last thing you should do is to keep yourself informed. To help you and other business owners, we created a content hub that lists a myriad of articles that can help you survive this crisis.
Options To Getting Cash For Your Business
The free cash flow formula will help you determine the right loan amount. Obtaining cash for your business can be a crucial ingredient in helping you expand or work through unexpected events that come up. Regardless of your case, there are many options available to you.
Depending on why the cash is needed, and how much your free cash flow formulas says you require, there are several options for obtaining capital, which we’ll divide into two major categories:
Short-term Revolving Lines
- Lines of Credit
- Credit Cards
Long-term Installment Loans
- Secured Installment Loans
- Unsecured Working Capital Loans
These particular options allow borrowers to generally pay interest on the balances they have outstanding, allowing them to reduce interest payments as they reduce their balances.
Usually, these types of credit are easier to apply for and require less information. However, because these products are more flexible and easier to come by, they usually involve higher interest rates.
Installment loans are more suitable for long-term investments and are paid back within 2 and 7 years.
With secured installment loans, you can get much better interest rates than you might receive from lines of credit. But the trade-offs are that they usually require more information than lines of credit, and do not always offer as much flexibility in the product. “Secured” means that you will need to pledge collateral that guarantees you can return the money.
At Camino Financial, we offer unsecured working capital loans, which do not require you to pledge collateral for the loan. In this case, your personal assets can only be seized through a bankruptcy court. Our loans don’t have pre-payment penalties, either. What does this mean? It means that we won’t charge you any fees if you decide to repay your loan early. This makes them an excellent candidate to be used as bridge loans.
Read this article if you need to know more about the differences between secured and unsecured loans.
How Can Camino Financial Help you Fund Your Working Capital Needs?
With a fast and easy online process
One of the great things about working with Camino Financial is our online process is extremely easy to follow with 3 easy steps:
- Submit an online application to receive pre-approved terms
Click HERE and complete a mobile-friendly loan application (it should take you between five and ten minutes). No documentation is required, and applying will not impact your credit score.
- Review the loan terms and authorize the download of your bank activity
Within one business day, you’ll receive a text with the pre-approved terms of your loan, and your assigned business loan specialist will contact you. After reviewing the terms, take one minute to authorize Camino Financial to download the last six months of bank account activity to verify your business income. Rest assured, this step of the process is totally secure. Depending on your credit profile and loan terms, your business loan specialist may request additional documentation to verify your income.
- Sign the loan contract and get funded
The credit department will take between 1 to 8 business days to review your loan application. Upon receiving final approval, sign the mobile-friendly loan contract, you’ll receive via email. You’re done! You will receive the funds directly to your bank account within two business days.
To sum up, you can get a business loan within 1 to 10 business days with less than a single hour invested in your time.
With loan products that adapt to your needs
We offer business term loans that range between $5,000 to $400,000. Our business loans are paid down over 24 to 60 months through fixed monthly payments. Our monthly interest rates vary from 1.0% to 2.5%.
With tools that allow you to be in control of how much you want to pay
If you want to evaluate the terms of a potential loan before submitting a formal application, feel free to try our online loan calculator. It will allow you to measure the monthly payments at different loan terms. Simply input:
- The amount you want to request
- The number of monthly installments you want for your credit; between 24 and 60
- The monthly interest rate
After entering these three figures, click “Calculate.” All the information you need will show up on the screen. You can reset this information as many times as you want until the result completely fits the needs of your business.
As you can see, working with Camino Financial allows you to obtain the benefits of a personalized solution with a lender that cares about getting you an affordable rate on the right sized loan for your business. We know that applying for a business loan can be a scary process.
However, we work hard to make this as easy and as transparent as possible. We strive to bring you the best financing solutions to help you achieve incredible success.