Cashflow finance speeds up cashflow during times of growth, business acquisitions or seasonal sales cycles to help a business reach its full potential. Here’s how to decide if it’s right for your business.
Cashflow finance is a valuable product for small businesses looking to fund their company through business assets. Using the financial strength of their customers allows a small business to source much needed working capital and not rely on personal assets. Importantly, this facility can grow with the business as sales revenue grows, giving small business owners the opportunity to support their business with the necessary cashflow to meet growth demands.
What is cashflow finance?
Cashflow finance, sometimes also called debtor finance, is a working capital facility directly linked to the value of a company’s approved unpaid receivables. That sounds complicated but what it means is that it is a form of financing in which a funding facility is backed by a company’s expected future cashflows.
Where a traditional overdraft facility is typically pitched to your level of security (setting the limit of finance available to you), cashflow finance limits can continually increase to cater for system growth. As your debtors and business grows, so too does the opportunity for you to draw against your increasing asset.
How does it work?
By providing a business with access of up to 80 percent of their approved debtors ledger, cashflow finance speeds up cashflow during times of growth, business acquisitions or seasonal sales cycles to help a business reach its full potential.
- Fast turnaround. When the bank knows your business cashflow needs may be able to be met in as little as 24 hours.
- Confidentiality. Cashflow finance is conducted between the business and the bank. Debtors needn’t know that the bank is advancing against invoices.
- Growth and long-term focus. Using cashflow as a business practice gives you the opportunity to employ additional staff to take advantage of market and competitor conditions and to view your business with a long term focus.
- Leverage. Businesses can pay creditors on time and obtain higher credit limits.
- Coping with unexpected changes. Businesses with a sound level of cash flow reserves can deal with variations in their demand levels when some clients delay or reschedule payments.
This is particularly relevant when, for example, businesses with between one and five employees are now operating under an average payment term closer to that of larger firms, at 53.2 days according to the latest Dun & Bradstreet trade payment analysis. The remaining balance is generally made available upon full payment of the full invoice by the debtor.
Would cashflow finance suit my business?
Your type of business, current financial situation and business strategy all need to be taken into consideration when deciding whether you need a cashflow solution, so make sure you talk to your financial adviser before making any decisions. But it’s handy to know about all of the products available to you, whether you’re a start-up or turning over more than $10million a year, as they can actually help you think outside the box!
Below are some key questions to ask yourself about your business and the use of cashflow finance:
- Does your business sell goods on standard credit terms?
- Does your business have good growth opportunities or ambitions?
- Does your business have limited fixed assets to utilise as security?
- Does your business have restricted liquidity?
- Does your business have seasonal sales activity?
- Does your business have slow paying debtors?
If you answered yes to any of these questions it may be worth asking your bank manager if they think a cashflow finance solution would benefit your business.
Cashflow finance in action
BOQ small business client Andrew Earl of national recruitment firm Attribute Group, said the introduction of cashflow finance into its business had contributed significantly to the company’s growth. “Within our first few months of trading, we found ourselves in a situation where we were paying our contractors on weekly payment schedules, but our own payment terms were monthly. Cashflow finance allowed us to fully expand our contractor book without having to worry about whether our contractors were going to be paid or not; it was great to have that security.”
The biggest benefit of cashflow finance is that it accelerates cashflow. Cashflow is key to keeping any business afloat. It allows a small business to purchase inventory, pay employees and expenses and improve the business. Without it, even the most successful ongoing concerns can grind to a halt through a short-term cashflow issue.
Effective use of cashflow or debtor finance can ensure that the money it costs to produce a good or provide a service is not tied up in debtors and is available for a business to use to keep doing what it does best. If you think it sounds like something that could work for your business you should chat to a financial advisor to review your options.