A seasonal business is one that has periods of high sales and periods of low sales and is often cyclical. A few examples include tax preparation services, outdoor adventure companies, tourism-related businesses, retailers, and more. Managing cash flow is more difficult for these seasonal businesses because they’re categorized by sales spikes and variable operational needs rather than stable operations and revenues.
This makes short-term financing extremely important for seasonal businesses because they’ll typically need to plug funding gaps during down periods as well as invest in things like headcount and inventory before busy seasons. In both scenarios, businesses are usually unable to self-fund and need outside help. If you’re a seasonal business in need of this additional financing, there are specific loan options ideal for you.
1. Short-Term Business Loan
Short-term business loans can give your business the fast financing it needs to meet temporary cash flow requirements. These loans typically have terms between 3 months and 3 years and you can typically borrow between $2,000 and $500,000, depending on the lender. Rates range between 9% and 50% or more and there is sometimes a prepayment penalty, but not always.
Qualifications for short-term loans vary from one lender to another. Typically, a credit score of 600+ is required and you must be in business for at least 6 to 12 months. Seasonal businesses like retailers that need to stock up on inventory before the 4th quarter are ideal candidates for short-term loans. This is because they typically know how much financing they need and will have cash reserves throughout the 4th quarter and beyond to make the amortized payments.
2. Business Lines of Credit
A business line of credit lets you draw funds against a predetermined credit line as you need it. It differs from a term loan in the sense that you don’t receive the full amount as a lump sum and then make amortized monthly payments. Instead, it acts much like a credit card where you only draw down the funds that you need, and only repay the amount that you have actually used.
The qualification requirements for business lines of credit vary by lender. Typically, a credit score of 600+, time in business of at least 12 months, and about $100,000 in average annual revenue will get you qualified. Credit lines range from $10,000 to $100,000 with rates from 13% to 50%+, depending on the lender and your qualifications.
Lines of credit are ideal for seasonal businesses that are unsure about how much they actually need to cover things like inventory and hiring costs, because you don’t have to use it if you don’t need it. This is also ideal if you don’t know how low your revenue will dip during slow seasons for the same reason. However, some lines of credit will have annual service fees and fees that require you to draw a predetermined amount per year, which could put you in financial distress.
3. Merchant Cash Advance
A merchant cash advance (MCA) is a lump sum cash advance in exchange for a fixed percentage of your daily credit card sales. The difference between a merchant cash advance vs a business loan is that an MCA offers flexible repayment terms based on your daily credit receipts while a business loan requires fixed monthly payments. This makes repayments lower during off periods and higher during busy periods.
The average rates of a MCA range between 80% and 120%, and you can borrow from $5,000 to $500,000. Qualifications also vary depending on the MCA provider. Usually, you need to have accepted credit/debit card payments for at least 2 years, have at least $50,000 in annual credit/debit card sales, and a credit score of 500 or higher. Typical terms are 4 to 18 months, depending on the fluctuations of your daily credit card sales.
Although a merchant cash advance has a relatively high APR, inflated due to the variable repayments, and the actual cost of capital is typically between 10% and 40%. This is an ideal financing option for businesses that do most of their sales via credit cards and need financing during slow periods, since repayments are based on credit card revenues.
4. Small Business Credit Cards
A small business credit card, like a business line of credit, offers a credit line that you can draw on when needed. You only have to repay what you borrow and you only pay interest on what you use. While this isn’t a primary financing option many small businesses think about, it could be perfect for those that need to buy things like inventory on credit to prepare for busy seasons.
There is a range of business credit cards available for those with good, fair, and poor credit. Depending on the card, ongoing interest rates can range between 12% to 25%. Maximum credit limits typically depend on your personal credit score, but it’s possible to see limits between $5,000 and $50,000 plus. If you use a small business credit card, you’ll be required to at least make minimum monthly payments of principal and interest.
Business credit cards offer rewards points or cash back and sometimes have periods of 0% APR up to 18 months. This could be the best option for your business if you expect to repay the full amount you borrow within the 0% APR window or if the cash back/rewards points offset some of your expenses.
The highs and lows of seasonal businesses can be thrilling. Still, the managing cash flow of a seasonal business can be very challenging. Luckily, there are funding options ideal for companies with fluctuating revenues and operational needs. Depending on your situation and your needs, a seasonal business can get financing via a short-term loan, lines of credit, merchant cash advance, or small business credit card.