Is limited access to working capital holding you back from achieving the growth aspirations you have for your small business? A recent small business survey conducted by Xero found that in any given month, about half of Australian small businesses are cash flow negative, with more money leaving the business than flowing into it.
Years ago, the funding options available to small business owners were relatively limited, with bank loans and capital injections from private investors the most common sources of additional working capital. Today’s small business owner has plenty of choice – but it’s important to select the right working capital solution for your business. The right funding solution for you will depend on how much money you need, how long you need the funds for, and your financial position.
What is working capital and why is it important?
Working capital can be calculated in a number of different ways. However, in simple terms, it’s the amount by which your business’s current assets exceed current liabilities. Depending on where you are in the business lifecycle – and day-to-day challenges such as late payers, unexpected bills, etc. – your working capital needs will change over time.
Many small businesses cannot meet their working capital needs each month by relying on their accounts payable alone. A working capital finance solution can help small business owners to manage this shortfall in cash – either as a short-term solution or an ongoing arrangement.
Almost all small businesses will need support with accessing additional working capital at some point; a planned and proactive approach to obtaining approval for this funding ahead of when it’s needed will give you time to identify the right finance solution for your business now, rather than scrambling to source funding urgently when cash flow is tight.
You should always speak with your accountant before entering into a contract to access additional funding for your business. The type of finance you choose can have a significant impact on your cash flow and tax obligations, so it’s essential that you fully understand your options and their ongoing implications for your business.
We explore four of the most popular ways for small business to source additional working capital below.
Credit cards are one of the most common ways for small business owners to access additional funding. If you already hold a business credit card, there’s no application process and you can access funds immediately.
Credit cards are a popular option for meeting short-term needs or making a large once-off purchase, however they’re a high-interest option compared with most other working capital finance options. Before you use your credit card for a funding boost, ensure that you’ll be able to make payment when it’s due – fees for a missed or late payment are particularly high, which will further erode your cash reserves.
Line of credit
Business lines of credit are an attractive financing option but are generally difficult to obtain unless your business has an excellent credit score and a strong trading history. A business line of credit will usually be unsecured.
A great feature of most business lines of credit is that you don’t need to pay any money back until you draw upon the line of credit – it’s a facility you can arrange ahead of any anticipated cash shortfalls and call on when you need it.
Also known as invoice finance, debtor finance is a flexible solution that allows you to access funding using your accounts receivable ledger as collateral. Providing immediate access to the funds tied up in your receivables, debtor finance allows you to pay bills, fund expansion or meet unexpected costs with ease.
Similar to a business line of credit, you can draw down and repay funds as you need while only paying interest on the funding you have accessed. With a 2017 survey of Australian SMEs revealing that the average debtor period for small businesses is now more than 50 days, invoice finance is a sensible funding solution that allows business owners to ‘dip into’ their accounts receivable ledger as needed on an ongoing basis.
Trade credit is a popular form of short-term financing for small businesses. If you have a strong relationship with your creditors, you may be able to negotiate more favourable credit terms – either as a once-off or on an ongoing basis. Common trade credit terms are 30, 60 or 90 days from receipt of goods; generous creditors may even allow you to carry a balance rather than clearing your ledger each month.
If Christmas is traditionally a quiet period for your business, it may be worth approaching your creditors prior to end of year to ask if they’d be willing to consider extending your payment terms as a once-off. Likewise, you could ask if they’re open to you carrying a balance throughout the holiday period if you place a large order in November.
With Christmas just around the corner, many small businesses will find themselves facing into cash flow challenges in December and January. Obtaining the right working capital finance solution for your business now will give you peace of mind that you’ll have access to additional working capital if you need it.
Cashflow Finance has 30 years of experience working with Australian small businesses to take the pressure off when cash flow is tight. Contact us today for more information about our flexible invoice, equipment and trade finance solutions.