Financial safety nets like bank overdrafts and spot factoring can assist Australian businesses in avoiding cashflow shortages.
The majority of Australia’s small businesses fail in their first year, with evidence suggesting that first-time operators have roughly a 50/50 chance of survival and that will largely depend on how they manage the business.
Cashflow is the lifeblood of any business and small business owners would be wise to explore two types of products that can be effective ‘safety nets’ as part of their arsenal in preparation for difficult periods that can paralyse a business, according to the Chief Financial Officer of the Interface Financial Group David Hechter.
“ The first year of operation is usually when expenditure is high, but availability of finance is painfully low. Allowing entrepreneurs the ability to focus on building their business as opposed to worrying about cashflow is incredibly important for the new business’ survival in the early days.”
“The reality is that if small businesses want to provide services to larger businesses, they have to be able to offer them payment terms which impacts cashflow,” added Mr Hechter.
The first of these safety-nets is a bank overdraft, which allows the business to operate a negative operating account for a period of time by turning this amount into a loan and charging the business for an interest rate based on the amount of time that there is a negative position in the account.
When a small business is not eligible for an overdraft or has reached the maximum amount of their existing overdraft facility can make use of spot factoring or selective invoice discounting. This product allows the small business to convert its unpaid invoices into cash by selling specific invoices at a discount.
The main benefit of these two types of safety nets is that no fees or interest are charged when the facility is not in use and businesses are able to use them only when needed.