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