Running a small business is hard, no matter what experience or knowledge you bring to the table. In Australia, over 60% of small businesses fail or stop operating within their first three years of operations. The number rises as time goes on – only the very best will prosper in the long run. There are many reasons why a small business might not succeed, including choosing a poor physical location, ineffective business model, lack of management aptitude or no clear plan to expand sustainably. While all these issues are common, there is another that trumps them all – a lack of cash flow and sufficient working capital.
More often than not, people underestimate the importance of financials on their business’s viability. It’s easy to overestimate the revenue potential and ignore the reality of the accompanying operational costs. Regardless of their level of optimism, small businesses seek an external source of funding for two broad reasons: to pursue an opportunity or to solve a problem. Pursuing growth is intuitive and exciting; you need money to invest in new projects, locations, and to support additional customers. While solving financial issues may not be as exhilarating, it’s probably more important for your small business’s survival. Here are our top reasons why small businesses might seek finance.
To grow and expand
One of the best uses of business finance is to pursue growth opportunities and create value for your business, your customers and the broader economy. For small businesses that sell their wares or services to other businesses on credit (issue invoices), there is often a lag of 30+ days between making a sale and cash reaching your account. Since payment is not received upfront, supplying a large new customer may require a large chunk of cash that you do not have. Financing options such as debtor finance fill this gap by funding your business based on your accounts receivable ledger.
“In Australia, over 60% of small businesses fail or stop operating within their first three years of operations.”
If you run a physical business, you might want to expand by opening new locations to reach new customers. Purchasing a new property, setting up an office or store fitout can be expensive and may require a loan to make ends meet. You’ll also need to ensure you have sufficient working capital to pay additional staff and outgoing expenses. A small business loan or a business line of credit may help make ends meet before new revenue is generated. Another increasingly popular growth avenue is purchasing new equipment. Whether you want the latest technology, software, construction machinery or business vehicles, equipment finance can help fund new commercial assets to improve your operations.
Close the cash flow gap
While late-paying customers have always been an issue for businesses, the severity of the problem has increased in recent years. In response to current economic pressures, many larger firms are using their bargaining power to delay payments to small businesses – as they face a squeeze on their supply chain as well as declines in demand for their products and services. The result is $115 billion in late payments to small businesses every year – denying SME’s more than $7 billion in working capital annually.
If your business is facing issues from customers that stretch your payment terms, the government’s SME Loan Guarantee Scheme may help you get through this challenging period. Loans under the scheme feature a six month repayment holiday – providing your business with a significant cash flow buffer while you implement strategies to improve your customer compliance, such as e-invoicing and training your staff on best-practice collection policies.
Support seasonal trading
Not many businesses have consistent trading throughout the year. Most will have some amount of variability in customer demand and therefore, their cash flow. During peak periods, the need for capital will be higher as increased supplies are purchased and running costs rise substantially. Alternatively, businesses with higher fixed costs may have a severe cash-flow deficit during times when sales slow down.
“Alternative financing solutions enable your business to link funding with your level of activity”
Revolving credit facilities are commonly used by seasonal businesses to access funds when they most need them. Instead of a small business loan, where repayments are fixed and regular, alternative financing solutions enable your business to link funding with your level of activity. A business line of credit lets you draw funds at any time, paying interest on only what you use. A merchant cash advance is another popular solution that allows you to borrow a lump sum while repaying it as a small percentage of your future sales.
Debt restructuring for peace of mind
How long would your small business last if things suddenly went belly up? In business, situations can change rapidly, leaving you scrambling to save everything you’ve worked so hard for. Proactively managing your finances and funding position to create a sufficient buffer is a smart move. Debt restructuring is often used to consolidate your borrowings into a single, more manageable repayment. Often, you will be able to access more funds and attract lower interest costs by bringing all your existing loans into one facility. Refinancing your debts may help your company free up cash, reduced administration and provide a meaningful buffer if things turn south.
Regardless of your reason to seek small business finance, consulting an expert is always a great first move. Business finance brokers use their experience and industry knowledge to source the best deal for your small business’s unique situation. Capital Plus Finance is an experienced invoice finance broker that has your best interests at heart. The team at Capital Plus Finance will do everything we can to help you secure a suitable finance solution for your SME. Please give us a call anytime to find out more or to have an obligation-free chat about your business’s funding situation.
