Loans, credit cards and invoice factoring

Looking for some finance to boost your cash flow? We weigh up the pros and cons of different business finance options.

When your business’s cash flow is poor, you may have no other option than to seek finance. Financing your business is nothing to be ashamed of. From 2013 to 2014, 16 per cent of Australian businesses sought credit or loan finance, with 42 per cent of those businesses doing so to maintain short-term cash flow, according to the Australian Bureau of Statistics (ABS).

Lenders are usually happy to help small to medium-sized enterprises experiencing cash flow shortfalls. As of February this year, Australian businesses owed approximately $41.3 billion in commercial credit and loans.

So how do you know what kind of finance is right for your business? Let’s explore some financing options.

Business credit cards
Business credit cards are popular because of their ease of use. They allow you to keep your business and personal expenses separate and easily track your repayments through online banking. Because of their high interest rates, they are best suited for short-term financing of smaller cash amounts.

Compared with personal credit cards, business credit cards have higher credit limits, lower interest rates and allow businesses to set restrictions on employee spending. Quite often businesses earn benefits for using these cards, such as rewards or cash back for advertising, travel, shipping and other business-related expenses. And having multiple staff using them helps streamline your business purchasing.

On the downside, annual fees for business credit cards can be quite steep. They also require constant repayments to a schedule determined by your financial institution, lest you incur costly interest, penalties and fees.

Overdraft facility
Using an overdraft facility is another common way to deal with cash flow shortfalls. The facility links to your company’s business account and functions as an ongoing line of credit. It’s especially useful for businesses that experience cash flow gaps or unexpected expenses.

An overdraft facility is highly flexible. You can pay your balance when you want, it requires little paperwork to set up and you can access funds whenever required. There’s also the added benefit of not having to pay any interest until you access it.

The majority of overdrafts come with generous limits, but have high interest rates that could hurt your bottom line when spending is uncapped. Lenders can also change the overdraft limit, or cut it off at any time, leaving your business high and dry.

Secured and unsecured loans
Secured and unsecured loans are very useful for small to medium-sized enterprises that need lump sums for capital expenses. Unsecured loans have shorter loan terms than secured loans, are usually for smaller amounts, and you can receive loan approval within 24 hours. Both secured and unsecured loans usually have lower interest rates than credit cards, so they are often useful in helping consolidate credit card debt.

On the flipside, acquiring finance through a loan involves more administration than for a bank overdraft, and if you want more money, you need to apply for subsequent loans.

Secured loans are harder to obtain, but allow you to access larger loan amounts as your business assets become your guarantee. This means the financial institution can claim your assets if you fail to meet their repayment terms.

Invoice factoring
Invoice factoring involves selling your outstanding invoices to a third party at a discounted rate for immediate cash. The factoring company will usually pay 80 per cent of the cost of the invoice upfront and 20 per cent (less a fee) upon invoice payment.

The chief advantages are that you spend less time chasing invoices and continue to receive cash when debtors fail to pay on time. There are also no repayments, interest rates or penalties. The downside is that as the factoring company takes a fee, you end up receiving an amount lower than what your debtors would have originally paid.

Make sure you shop around
Whatever finance option you choose, it’s important to study the conditions they each entail and find one suitable for your circumstances. By doing your homework and not overextending your business’s finances, you can find the right balance between finance and cash flow.

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