Incurring income loss in a business is not a unique phenomenon. It is quite common for startups and new businesses to face losses in the short run before they are able to grow. However, income losses are not merely limited to small businesses. Many large and well-established firms also find their income statements showing a loss rather than gain. If such a scenario occurs, the chances are that it is time to make some changes to the business.
What Is an Income Loss?
Income loss in a business is showcased in the monthly or yearly income statement of a company. It means that the firm is not making enough money to cover its expenses.
When such a loss is incurred in the short run, it may not always be a terrible thing considering that most companies do their business in credit, i.e., they have pending receivables and payables. As long as there is a hefty receivable that will make everything better and a positive cash flow, a company can still work even if its income statement shows a loss.
Can Companies with Loss Borrow?
One effect that income loss has on a business is on its ability to borrow. The question arises, can you borrow at all?
Think about it, would you give your money to an individual if you don’t expect them to pay you back? A rational person will not. Everyone strives to reduce risk in business, and lenders are no different.
Traditional borrowers are known to be risk-averse rather than risk-takers. If your company is operating at a loss and they don’t think you have it in you to pay them back the original amount along with an interest, there is a high probability that they will not lend you money.
Positive Cash Flows
Does a loss, as reflected on the income statement, mean that you are not receiving any cash? No. It is possible to have a positive cash flow. This can occur when your income statement includes items like interest expense, depreciation, and compensation. Once you add these costs back, you will find that your cash flow is positive, i.e., you are receiving more cash than you are giving out.
This scenario might allow you to borrow from lenders who use add backs. However, remember that not all lenders follow this policy.
Income History Matters
Let’s say you are a company which normally fares well for itself and is profitable. However, you face a massive setback and now require finances. The chances are that you will end up getting the required amount through loans, even though you are operating at a loss. This is because lenders take income history and past profitability into account.
If you have a reputation of making loan payments timely and have a positive income history, the lender will think of the setback as temporary and will be confident enough to invest in you.
Since we have established that traditional lenders will not be willing to lend their money to a company engulfed in losses, the question of whether the company can borrow at all remains.
If you are unable to find a lender that is willing to provide you with the required finance, you can opt for other ways of borrowing. These options include a business credit line, credit cards, and short-term loans. It is not to say that such loans will come easily to you, but you have a comparatively higher probability of getting them than borrowing from an average risk-averse lender.
Even if your company is at a loss, you can borrow money. However, the difficulty of getting it varies.