If you're running a small business, one of the biggest problems you face is cash flow. Here we look at some of the ways in which you can improve the cash flow of your business, including:
The traditional way for a business to improve their cash flow was to run an overdraft. However, you're charged a fee to get an overdraft and ongoing fees to maintain the facility. Also interest rates on overdraft facilities tend to be higher than for residential home loans. With more flexible business finance products emerging, overdrafts are becoming a less popular way to address cash flow issues.
Credit cards are easy to get, easy to use, and can be a good way to finance and monitor employee business expenses. However, they are generally not the most economical way to deal with cash flow problems. The interest rates on credit cards tend to be higher than for residential home loans, and you can quickly get in over your head. There are other specialised ways to improve your cash flow.
You've done the work and sent the invoice but you don't have the money. This is particularly frustrating when your debtors don't pay on time - which is most of the time.
With factoring (also known as debtor finance, invoice factoring, invoice discounting or invoice finance), a lender gives you a percentage of the invoice (usually 80%) in cash, then the remainder when the invoice is paid. This service incurs a charge but can save your bacon in cash flow terms. Beware that if the debtor ultimately does not pay the invoice, you must repay the lender all the money you've been advanced.
If you've bought stock, it can be some time before the finished goods are sold and this can have serious cash flow implications - particularly for importers and exporters.
With trade finance (also known as stock finance, inventory finance, export finance or import finance), the lender gives you a percentage of the money against the stock you've purchased. Again, you pay for the service but it can make all the difference in cash flow terms. Lenders are much less inclined to loan money for stock sitting in the warehouse than they are for confirmed orders.
For many small businesses, leasing cars, computers and equipment is preferable to outright purchase because it improves your cash flow. These options are explored in more detail in other MFAA Borrowing Essentials.
To discuss ways to improve your business cash flow, contact your MFAA member today.