How to get financing for an unexpected business expense

What is an unexpected expense?

Surprise expenses cover a wide range of situations. Your equipment broke down, for instance, or you need repairs that your insurance won’t fully cover after a water damage. Mazerolle also extends the definition to include unexpected events that lead to a revenue drop, such as a sudden illness or the loss of a key employee.

Happier circumstances can generate unexpected expenses, too. A used hockey equipment reseller could stumble upon a batch of heavily discounted gear that’s too good to pass on in the middle of summer, when it doesn’t have enough cash to buy it.

Unexpected taxes or payroll remittances to the Canadian Revenue Agency, however, are off limits. This is the kind of expense that you should predict and prepare for.

Credit card, line of credit, cash flow loan and other solutions

When deciding how to pay for the unexpected expense, consider the amount and the purpose of your expense, and the duration of your project. Then, look at the following options to decide on your next move.

1. Credit card 

Credit cards are a convenient source of short-term credit, allowing business to make small expenses right away. But they tend to have high interest rates and require discipline to avoid accruing interest on your debt.

“Don’t use your credit card for anything you can’t pay off in a month,” Mazerolle says.  

2. Line of credit 

A line of credit is short-term financing (usually 30 to 90 days) you can draw on as needed for daily operating expenses and temporary cash flow shortage, for instance when faced with a lag between sales and customer payments. Is it usually secured against a company’s accounts receivable and inventory, so the interest tends to be lower than for a working capital loan.

If you use a line of credit for a longer-term investment, you risk losing the trust of your lender and get less favorable terms when it comes up for renewal.

“Lines of credit are supposed to revolve with your inventory and receivables,” Mazerolle says. “Don’t put repairs to large assets on it.”

3. Cash flow loan

Also known as working capital loan, it is typically used to fund longer-term investments or purchases, with a repayment period of up to eight years that matches the duration of the project.

It is generally tied to expansion plans, for example the hiring of new staff. Repair after a damage belong in here too, Mazerolle says.

4. Equipment loan

An equipment loan is a specialized term loan used to finance equipment acquisitions. You can also get extra cash for additional costs.

“If you have a large amount of money you need in equipment repairs, go to the person financing your equipment and see if you can borrow more money for that equipment,” Mazerolle recommends.

5. Postponement

Some banks, including BDC, let you extend the terms of your loan for a small fee. Ask yourself if a 3-month or a 6-month postponement of the principal would free enough cash to pay for your expense, Mazerolle says

“If you get sick or have a bump in the road, you can come to us for postponements,” she says. “We’re not a fair-weather lender.”

What documents do I need to prepare to apply?

Requirements will vary depending on the kind of financing you choose. Generally, financial institutions tend to ask for the following documents:

• Company details: Information about your company’s history, current operations, strategy and management team experience. 
• Financial statements: Banks typically review financial statements to understand a company’s financial health, profitability and capacity to repay debt. For larger loans, statements are needed for the past two years along with interim statements comparing the latest period with the same period in the previous year.  
• Financial projections: Banks typically require a monthly cash flow forecast for the remainder of the current year and the following 12 months. In some cases, two years of projections may be requested. 
• How you’ll use the loan: Give details about the project or plans for using the financing and exactly how it will help your business. 
• Personal finance information: Lenders may request more information to evaluate  
• Proof of paid taxes
• A quote or an invoice: In the case of repairs, remember to build in some contingency as costs often can higher than estimates.

How to avoid and deal with unexpected expenses

Not every expense is predictable but there are steps you can take to minimize surprises and make sure there is always money on your bank account.

Learning to manage your cash flow is a good start. The quicker you collect, the better your cash flow will be. If your vendors expect to be paid within 30 days, ask your clients to pay you within 30 days too. You can even offer them early payment discounts as incentives.

With help from the right software, you can also prepare cash projections for the coming year with expected inflows and outflows, including large purchases on the horizon. If you spot that a cash crunch is looming, you can make a remedial plan.

Know your business and its risks  

It can be a good idea to get extensive insurance coverage. Also plan regular maintenance of your equipment. And don’t leave recurring expenses for the last minute when you could be spreading them out throughout the year.

“If you missed a 250 000 expenditure, you’re asleep at the wheel,” Mazerolle says.  

 Last, make sure your lender understands the specifics of your activity. If your business is seasonal, banks like BDC offer seasonal payment plan. That could go a long way in avoiding a cash crunch.

Build an emergency fund

Unplanned expenses, in good and bad times, are bound to happen. You can’t go wrong by building an emergency fund.

“Cash is king,” Mazerolle says. “Always have cash aside so you are in a position of power.” 

One way to do that is by keeping your loan repayments manageable, leaving you room to build a slush fund. Take the longest amortization period that’s offered and resist the temptation to pay back early, she says. 

To figure out how much cash to keep, go through your contingencies and make a cost estimate for each. It is not just about the money. Having an emergency fund will also give you peace of mind.  

Next step

Prepare a compelling loan application with our free business loan toolkit and improve your chances of getting financing.