Seasonal borrowing done properly

Seasonality is the most forecastable cash need a business has. You know roughly when the build starts, roughly how big it gets, and roughly when it unwinds. That makes it the one case where you should be able to arrange financing precisely rather than reactively.

Use a revolving facility, not a term loan

Illustrative only — a business builds $180,000 of inventory over four months, sells it down over the following three, and does this once a year. On a revolving line at a stated 11%, with the balance rising and falling so the average outstanding across the seven active months is around $99,000, interest for the season is roughly $6,353, and the balance is at zero for the rest of the year.

Illustrative only — the same $180,000 taken as a 36-month term loan at a fixed 13% is a payment of $6,064.91 every month, including the months with no sales, and $38,337 of total interest across the term.

The term loan also has a second problem. Next year's build needs another $180,000, and the first loan is still running.

Sizing it

Size to the peak cash requirement, not the peak purchase. Those are different numbers because collections continue while the build happens.

Build a month-by-month cash forecast for a full twelve months: opening cash, receipts by month, payments by month, closing cash. The largest cumulative negative is your peak need. Add a buffer — an unusually late season, a slow-paying customer, a supplier requiring a deposit — because a line sized exactly to the forecast fails in the first month the forecast is wrong.

Then check the shape. If the forecast shows the balance reaching zero at some point in the year, a revolving line is the right instrument. If it never reaches zero, part of the need is permanent and should be termed out separately, with the seasonal line sized only to the swing above that floor.

Building the peak cash requirement

Track closing cash month by month: January $22,000, February minus $46,000, March minus $114,000, April minus $172,000, May minus $205,000, June minus $123,000, July minus $21,000, August plus $51,000.

The inventory purchases total $180,000. The peak cash requirement is $205,000, in May, and the facility returns to zero in August. Size the line to $205,000 and add a buffer. Size it to $180,000 and you run out in the last month of the build, which is the month you can least afford to stop buying.

The gap between those two figures is operating costs incurred during the build against receipts that have not arrived yet. It is always there, it is always larger than expected, and it only appears if you forecast by month rather than by season.

When the season does not behave

Arrange it out of season

The worst time to apply is the week you need the money. Underwriting takes what it takes, financials get requested, and a seasonal business applying at its cash trough presents its weakest balance sheet and its thinnest bank statements.

Apply in your strong months. The financials look their best, the operating account shows healthy balances, and you have time to answer questions without a purchase order waiting. A committed line arranged in your peak season and drawn six months later is the same money on better terms.

What to have ready

Lenders assessing a seasonal business generally want to see the pattern and the plan, not just the annual total:

• Two to three years of monthly figures, so the seasonality is visible rather than asserted
• A month-by-month cash forecast for the coming year with the assumptions stated
• Purchase orders, supplier terms, or a pre-season order book if you have them
• Evidence of last season's sell-down: how quickly the inventory converted, what was left over
• An explanation of what happens if the season is 20% weaker than forecast

That last one is worth preparing whether or not you are asked. A borrower who has already modelled a soft season and can say what they would do reads very differently from one who has only modelled the good case.

The signal to watch

If the line does not return to zero by the end of your strong season, that is the diagnostic. Either the season underperformed, the margin is not what the plan assumed, or the facility has been financing something other than the seasonal build. Investigate it before the next build starts, because a balance carried into a second season compounds into a facility that can no longer be sized to the swing.

Many lenders write a clean-up requirement into seasonal lines for exactly this reason. If yours does not, apply the test yourself.

The clean-up requirement, and what it is really testing

Many seasonal lines carry a clean-up provision: the balance must sit at zero for a continuous period, commonly 30 consecutive days, at some point in each twelve months.

It is not an administrative formality. It is the lender running the same test you should be running — whether the line finances a swing or a permanent hole. A business that can hold zero for 30 days has a seasonal need. A business that can only touch zero for an afternoon by timing a deposit has a structural need wearing a seasonal facility.

If your agreement has one, put the clean-up window in the same calendar as the notice dates, and plan which month you will use. The month to pick is the one after your strongest, not the one before your build.