Financial hard times are common among small businesses. In fact, most SMES ‘live to tell the tale’ if they’ve got a few rocky patches under their belt along the way. These hiccups by no means signal the end of the road. Quite the contrary.
More often than not, a funding blip is an opportunity for you to re-evaluate where you are heading, get your ducks in a row and move forward positively.
- Controlling cashflow
- Cue short-term finance
- Bridging loans
- Invoice factoring
- Cash advances
- Keep your options open
- Ask the experts
Controlling cash flow
In many cases, the problems are short-lived and put down to experience. But this doesn’t mean that you can take your eye off the ball. You should, no matter what stage of growth your business is at, have the utmost control of its finances. You need to know what is happening right now and what will be happening in the future so that everything is expected and accounted for. Poor cash flow management is one of the main causes of failure among businesses.
By keeping a close eye on cashflow, problems are likely to be foreseen and easily fixed; particularly if you undertake regular forecasting. However, whether you are bootstrapping or have financial backing, there will always be times when cash is at an all-time low. Your customers may not have paid you on time, you may have had to quickly increase your stock levels or expand your team to meet demand. Whatever the reason, it is likely that you need a quick fix.
Cue short-term finance
As it says on the tin, this tends to be an interim finance solution that allows a business to keep operating in the here and now. It is a means to tide you over, usually on terms over a maximum period of 1-3 years.
Bridging loans
One of the most common forms of quick fix finance is a term loan, otherwise known as an unsecured, bridging or cash flow loan. The general parameters are that you agree with a lender how much you’d like to borrow, the rate of interest you will pay and the timeframe for repayment. And, if you are prepared with a robust business plan, a good set of accounts and have current bank statements at the ready, a business loan can be arranged in a matter of hours – assuming you meet the criteria.
But even if it’s just for the short-term, there are some considerations you should make before taking a small business loan. You need to understand if the interest rate is fixed or variable, because a variable rate makes your forecasting that little bit trickier. It means you will need to have a buffer in place for possible hikes in interest rates.
You also need to know if the loan is secured or unsecured. Depending upon the amount you are looking to borrow, a lender may proceed on an unsecured basis, but may ask that a director acts as a personal guarantor for the debt. Where larger amounts of borrowing are involved, a secured loan will simply provide the lender with the reassurance that the finance is backed by an asset. You just need to be mindful (and confident) of what you are offering as security because it will be in the form of property, machinery or equipment. And you could lose this in return for clearing the debt.
Invoice factoring
An alternative route, of course, is to opt for invoice factoring. This way you do not incur any debt against your business, but you do still generate that short-term stash of cash. Invoice factoring, in its simplest form, is a way for businesses to borrow against outstanding amounts due from customers. A lender effectively buys your unpaid invoices from you, giving you the majority of the value straight away. Once your customer then pays the invoice to the lender, you receive the remaining balance minus the lender’s fee.
Cash in your pocket is almost instant in this case. It is a form of finance that can be readily available as and when you require it, with the benefit of no long-term implications. The main downside, however, can be the hefty transaction fees involved. But then again, quick access to decent chunks of money is never going to come cheap; you are paying for the privilege.
Cash advances
If you are looking to avoid finance with high running costs in favour of one fixed repayment amount, then a business cash advance could be the route for you. The advance is based on your future revenue predictions, meaning your repayment will be proportional to your sales. The benefit is that you pay more back when your revenue is higher, and less when things slow down.
This is a great finance option for those businesses who experience seasonal fluctuations in their sales. And even better, the total cost of the finance is agreed up front. You only ever pay back the amount agreed at the outset, rather than being in the hands of rising interest rates. In general, cash advances are more flexible than business loans because they allow you to borrow and repay according to the projected success of your business.
Keep your options open
So, there are many options available for small businesses to overcome the short-term cash flow challenges they face. And it’s not a one size fits all outlook. You may turn to different finance options to fulfil different funding requirements. And you will make friends with different lenders along the way too. Not all of them will be open to the same risk every time, and their lending criteria will differ from one loan to the next – but it’s advisable not to put all of your eggs in one basket anyway. Instead, take the time to research and evaluate the best option for you each time the need arises.
Ask the experts
If you are looking to raise finance for your business but are overwhelmed with the options, or you simply find it difficult to get the terms you need, then we can help. At Pegasus Corporate Finance, we work with businesses to access and package the most affordable and effective funding solutions for their needs. And we’ll go the extra mile to achieve this for you.
If you would like to discuss how we could help you to reach your goals, give us a call on 0203 3270567 or email [email protected]. Alternatively visit www.pegasusfunding.co.uk.