In this article we take a look at the range of finance options available to small businesses who need to boost their working capital. We explore traditional options as well as one or two lesser known ways to fund your business.
There is a well-worn statistic that is quoted time and again that 80 percent of small businesses fail in the first 18 months. While the source of the statistic is shrouded in mystery, it has been quoted by credible bodies such as Forbes and Bloomberg, and whether it is entirely accurate or not, what is indisputable is that it takes hard work and a battle against the odds to turn a new business into a long-term success story.
The other thing that is beyond doubt is the reason that so many businesses crash and burn in the opening months. It is not because the business model is flawed, or they can’t get customers – in the vast majority of cases it is because they run out of cash.
Working capital is the lifeblood of business
It happens time and again – the order book is healthy, customers love the product or service, and things could not be going better. Until, that is, someone checks the bank balance and sees the cupboard is bare. With money tied up in stock and clients taking full advantage of credit terms or being slow to pay, it is suddenly impossible to pay salaries or purchase essential supplies to keep the business going.
The tragedy is that maintaining working capital for a business like this through external funding options is a simple matter. If the business was fundamentally flawed, it might be different, but where it is simply a case of needing to maintain cash flow to keep the business running smoothly and profitably, lenders will be waiting with open arms and cheque books at the ready.
When lenders are queueing up to help, that is good news for borrowers as it means an abundance of choice. Here are a few of the most popular ways to give your company a quick cash injection when it needs it:
- Bank overdraft – your bank will provide an agreed safety net by which you can go into the red, and the fees or interest charged are usually low. It sounds like the obvious solution, but there are a couple of stumbling blocks. One is that in recent years, banks have been less willing to offer overdraft facilities on business accounts. The other is that even if they do, it is typically a relatively small amount.
- Invoice financing – this is a great way to smooth out the peaks and troughs of cash flow. Invoice finance can help if money is tied up in outstanding invoices. The lender will give you access to a proportion of the money owed to you in advance, and when your customer pays you get the rest of the money minus a small fee.
- Revolving credit facility – most commonly compared to a bank overdraft whereby you are given a credit limit that you can dip in and out of whenever you need. The advantage here is that you only pay for what you use and there are no fixed monthly repayments. It is a valuable facility to have at the ready, just in case you face a difficult month.
- Unsecured business loan – probably the most popular way to borrow to help with working capital. A lender will give you a set amount of money to be repaid monthly over a few months up to a few years.
Monitor your cash
Any of these finance sources can keep your cash flow healthy and help your business through any tight spots. The most important thing, however, is to always be aware of your cash position so that you can see any icebergs on the horizon. If you could spot issues early you will be in a much better position to take action.