Whether your business is a start-up or established, cash flow is a vital component to its success. Maintaining cash flow can be a particularly tricky task for any business owner when trying to balance credit management requirements whilst also running and growing their core business.
Many business owners choose to give their cash flow the boost it needs by seeking a finance solution, that will provide additional working capital to aid in running and growing a business. However, the process of finding funding for your business can be an arduous task, especially if you have little knowledge of the options available and the right solutions for your business’ requirements.
A common error that businesses make is to seek out bank loans and overdrafts under the misconception that other financing options are solely for those that have been refused a loan or depleted their overdraft. This is simply not the case, and furthermore other financing options may be a much better fit for your business’ financial requirements in the long run.
Financing for business
Cash flow difficulties can come as a result of a number of factors, but one of the main reasons businesses struggle to maintain their cash flow is due to the fact that their cash is tied up in invoices for an extended period of time. For businesses that are in a period of rapid growth, those that require cash from an invoice quickly or those working in industries in which it takes long periods of time to convert receivables into cash, invoice financing can be an ideal option.
Invoice finance essentially allows a business to release a percentage of cash from an invoice as soon as it has been raised. This cash advance means that businesses will not need to wait the 30 or 60 days it would usually take for a client to pay an invoice. Collecting payment for invoices is subsequently carried out by the invoice finance provider who, upon payment by a client, release the remaining percentage of funds.
Like invoice financing, invoice discounting allows a business to receive a cash advance on their invoice as soon as it has been raised. Where invoice discounting differs is that it is entirely confidential, meaning that your clients will not know that you invoice finance. Payment for invoices also falls to the business itself rather than the finance provider.
This is an attractive option for many businesses, particularly those that wish to retain control over this area of their business, keep this vital contact with their clients whilst ensuring they are unaware that your business uses this form of finance.
Asset based lending
For many businesses, the ability to grow not only requires working capital but also using this working capital to invest in equipment, vehicles and other assets so that your business can work to its full capacity. For other businesses, a great deal of cash could be tied up in assets that ideally could go towards helping your business to grow.
Asset based lending frees up the cash within a business that is tied up in equipment, property or other assets owned outright by said business. This cash injection subsequently provides working capital for business growth and development.
The best option for your business
Determining which financing option is best for your business depends entirely on the way in which your business works and its requirements. A great finance provider should be able to provide an informed recommendation following an analysis of your business, so that whether it is a bank loan, overdraft, invoice finance, discounting or asset based lending, your business receives the ideal solution to allow it to thrive.
Ensuring you work with a reputable finance company is essential. There are a number of ways to identify whether or not a finance company will provide you with a high quality and compliant service, however first and foremost check the company’s accreditations and memberships. Trade bodies such as the NACFB ensure that lenders and brokers are operating compliantly and are providing SMEs with the right funding solution.
Article written by Paul Cooney, Managing Director at Zodeq.