Cash flow finance

Cash flow is one of the most important financial considerations for any business. Unfortunately, it is not uncommon for otherwise profitable businesses to suffer financial hardship in the short term because they are having difficulties with cash flow. Even small cash flow fluctuations can greatly impact on a business's financial status.

What is cash flow finance?

Cash flow finance is a way for companies to borrow funds based on their expected cash flow in the short and medium terms. Cash flow finance can take several forms, but most capitalise on a business's accounts outstanding and other working capital or assets in order to provide funding options to alleviate cash flow problems.

What types of cash flow finance are available?

Cash flow finance can take a number of forms. The best cash flow financing options for any business will always depend on its individual circumstances and the purpose and intended terms of the finance sought.

• Unsecured business loans. One of the more common ways of alleviating short-term cash flow problems is with an unsecured business loan. Without requiring any type of security, an unsecured business loan relates directly to a business's sales history, with loan terms negotiable between the lender and borrower.
• Invoice financing. Also known as invoice discounting or factoring, invoice financing frees up funds that are owed to a business by their debtors. In short, the lender or factoring company will buy your outstanding invoices and pay you upfront at a reduced rate, commonly around 80-85% of the total invoice amount. The amount of the invoice is now available for you to use, while the factoring company ensures eventual payment by the creditor.
• Line of credit. A business line of credit is a form of revolving loan that has similar features to a credit card, except that it generally must be secured to an asset such as commercial or residential property.
• Overdraft. Similar to a line of credit, an overdraft is a form of revolving loan, with interest payable on the outstanding balance at any time. Overdrafts are typically used to manage a business's ongoing cash flow fluctuations, and are linked to a business bank account.
• Business credit card. Credit cards tend to have higher interest rates than other forms of cash flow finance but have the added benefits of allowing multiple cardholders and being accepted for point of sale transactions. A business credit card also comes with unique features such as allowing multiple cardholders, business benefits such as points, and easy account management.

What features should I look for in cash flow finance?

Given that there are a number of different means for businesses to obtain cash flow finance, it is important to compare different products carefully and to be realistic about your cash flow needs and your business's ability to make ongoing repayments.

Firstly, eliminate any forms of finance that are not applicable to your situation. For example, if you don't have a significant business asset or property to offer as security, a line of credit will not be a suitable solution. Next, consider whether a one-off cash flow injection such as a business loan is a more suitable option, or if your business would benefit from a revolving loan situation such as a credit card, overdraft or line of credit.

Is my business eligible for cash flow finance?

A business's eligibility for cash flow finance will depend on the type of finance option chosen. For example, invoice financing is notoriously difficult to obtain, with some factoring companies requiring an annual turnover of $200,000 or more before a business can be considered. In addition, invoice financing requires invoices to be rendered on normal credit terms to a large number of debtors in order to minimise the risk to the lender.

A business's eligibility for an unsecured personal loan, on the other hand, will be based on different criteria than eligibility for invoice financing. Eligibility criteria will be more focused on the ability of the business to easily make the loan repayments by considering its past and ongoing sales, rather than focusing on the business's debtors.

How much will the loan cost?

The cost of cash flow finance will depend upon the type of finance sought.

• Unsecured business loan. When determining the cost of an unsecured business loan, take into account the variable or fixed interest rate, application and other upfront fees, ongoing fees, and any applicable default fees, late payment fees or early repayment fees.
• Line of credit. The cost of a line of credit will include an application fee, typically taken as a percentage of the approved upper limit of the credit line, in addition to account keeping fees, transaction fees and the applicable interest rate.

Similarly, the cost of a credit card or overdraft will largely depend on the applicable interest rate, while also taking into account initial and ongoing fees and charges.

How can I work out if my business can afford it?

Before applying for any type of cash flow finance, whether an unsecured business loan, credit card, line of credit or invoice financing, it is imperative to consider all potential costs of the finance and determine whether your business can afford the ongoing repayments.

This involves considering whether your business truly does have cash flow problems caused by unpaid invoices, or whether the business is generally unprofitable. Alleviating cash flow problems with appropriate finance can be a smart business move that will help tide your business over on an ongoing basis. On the other hand, propping up an otherwise failing and unprofitable business by incurring additional debt will generally only make your business's financial problems worse.

Have more questions about cash flow finance?

What if I don't have equity or an asset to offer as security?
If applying for a business line of credit, you will generally need residential or commercial property as security. However, other cash flow finance options are available for businesses without equity or an asset as security, potentially including a business credit card, overdraft or unsecured business loan.

How does a line of credit differ from an unsecured business loan?
The main difference between the two is that a line of credit requires an asset as security, whereas an unsecured business line does not. In addition, a line of credit is a revolving loan that could potentially last for the life of the business. An unsecured business loan, on the other hand, involves borrowing a predetermined lump sum and making repayments on an ongoing basis, working towards a set repayment date.

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