For SMEs, the first years tend to be the hardest years. Making sure your business model is spot on is already a challenge. If you add in an unpredictable market place, which is the case for almost any sector, cash flow and the day to day running of a business can be a problematic issue. A cash flow forecast can give a great indication of how things will go, but it could be late payments, a bad debt or even unexpected asset costs.
During those first years a large unplanned payment can sometimes put your business in trouble. So what are your options if this happens?
Could I Get A Bank Loan?
Banks maintain that they are willing to loan, but since the financial crisis, their lending criteria have been much stricter. Understandably if your business is having cash flow problems, then a bank might well deem it too risky. However, if you can prove to a bank that you have a viable plan and a genuinely successful business, then there is no reason why you wouldn’t be able to secure a loan.
If you do manage to successfully get a loan, making sure that you get the right amount is crucial. You don’t want to sell yourself short, yet at the same time, you don’t want to borrow too much and pay more interest than needed. Repayment plans are set in place before you take out the loan, and interest is often set at a fixed rate to make forecasting and predicting easier.
Applications for a loan can be a lengthy and stressful procedure, which require a lot of admin and planning work. For an SME, a bank would usually require at least two years of company accounts. If you are having cash flow problems and need a lump sum to help, then getting the credit as soon as possible is vital, so a lengthy loan application can sometimes add more of a burden.
It is possible to get a bank loan in a cash flow situation; however, it is not always the most viable solution to an emergency problem.
What about Invoice Financing?
For B2B businesses which use invoices, invoice financing can be a very attractive option if there are problems with your cash flow. It can be much less stressful for owners and offer up more time to concentrate on other aspects of the business. Invoice financing allows you to borrow a certain percentage of cash against your outstanding invoices.
A factoring company will first look at the quality and variety of your invoices, before assessing how much of a risk your business is. If the factoring company decides that your business is suitable, then they will usually lend you up to 90% of your unpaid invoices, however, this is variable depending on what kind of invoices you have outstanding. Once the factoring company has collected the unpaid invoices, it will repay the remaining balance to you less their charges. Invoice discounting tends to be for larger companies and means that instead of a factoring company collecting invoices for you, the business will do it themselves. The business collects their own invoices, then pays the invoice into a trust account for the factoring company to collect what they are owed. Invoice discounting essentially helps a business be discreet about the fact they are invoice financing.
As a cash flow solution for businesses this can be effective, as you are only borrowing money you’re already owed. Invoice financing does have many pro’s and con’s, but it can allow you to quickly sort out cash flow problems, as well as giving you the opportunity to focus on the alternative aspects of the business.
What About A Business Overdraft?
An overdraft for a business works in a very similar way to that of a personal overdraft. A business will have a pre-arranged agreement with a bank, meaning they have additional funds for emergency if their bank balance goes overdrawn. For any SME struggling with cash flow, this can be a very effective way to help with problems during the short term.
When and only if necessary, a business would be able to go into their overdraft and make any outstanding payments. However, things must be carefully agreed with the lender beforehand. Normally a bank will give an overdraft appropriate to the business’s needs, and to the risks associated.
Business overdrafts are a simple and easy solution for cash flow issues. They can be taken into account when working out a cash flow forecast and they can help you prepare for any large expenditures. Overdrafts are flexible too and you will only pay interest on the daily balances, not the overdraft limit, which can make it more effective than a business loan or invoice financing.
So What’s The Best Option For You?
Depending on where your business is, what you’re trying to achieve and what your problems are these are all viable solutions for cash flow. Each has their benefits, but like anything in business, it depends on your circumstances.
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