Whether a small or well-established business, there may be a need for a quick infusion of capital for various reasons. Therefore, cash is essential to a company's growth and financial management. Any fallbacks or delays in paying bills, suppliers and employee wages are common problems that may arise in any business. In such circumstances, a company needs an injection of cash. Many small business owners tend to worry about cash flow, external financing and taking on business debt. But the debt from the funding can be a step toward growth with better cash flow management.
When a business needs the cash for its smooth operation and growth, there are two potential routes you could follow. First is debt financing, where you borrow the money you need from a third party, such as Small Business Loans or a line of credit (business overdraft). The second is equity financing, where you sell a stake in the company to a third-party investor. However, with equity financing, the third-party investor may become a partial owner of your business and is granted a percentage of equity and share any profit your business makes. In this instance, debt financing could be the correct route to take.
Business finance should be straightforward. Our blog will walk you through every possible step to wisely funding your business with debt financing for the growth of a small business and how to manage the cash flow better.
What exactly is cash flow?
Cash flow is the difference between the money a company receives and the money it spends in a set time. The business has been sustainable if these receivables and payables are positive during that period.
Several things could help the cash keeps flowing. The first and foremost is staying on top of the day-to-day money management by managing accounts to track income and costs, reviewing costs and invoicing. A business should try to negotiate payment terms with clients and suppliers by shortening the invoicing cycle or arranging to pay some outgoing payments later in the month.
Debt financing to aid giving your business a cash injection
Line of credit
Acting as an overdraft, a business line of credit allows you a credit limit that can be paid back at any time. You can borrow and repay at an agreed credit limit. The flexibility is unrivalled, and even whilst the interest rates tend to be high, you will pay when only using the facility.
Business loans
Small business loans suit growing businesses that need an immediate cash boost when gearing up and pay that back, plus interest, over an agreed period. If the company has yet to establish a credit history or if the business plan does not meet the lender's requirements, traditional business loans might not get accepted.
Merchant cash advance
Merchant cash advances are lump sums calculated and approved based on the sales volume of the business without having to provide any asset security. The amount borrowed can be repaid with fees, but repayments can fluctuate in line with the income. That means if the business is booming, there will be higher pay, but during quieter months, the payments will be less. Even though merchant cash advances can be easier to be accepted, the drawback is that it is a little hard to predict future sales. It may best suit a small business that accepts customers' debit and credit card payments.
Invoice financing
Invoice Finance is a way of secured lending that allows a business to borrow funds on unpaid tax invoices. Rather than waiting for an invoice to be paid, a financial institution will advance a large percentage of the invoice value upfront, up to 90%. The invoices act as collateral, but fees may vary depending on the lender and the length of the loan. The lender (financial institution) will collect the amount owed for the due invoices directly from the customer and then pay the remaining balance minus any fees. If the business relies heavily on invoices and has a fluctuating cash flow, this can offer financial breathing space, better cash flow, and business growth.
Debt financing ultimately depends on what the business needs the funds for, how much you need to borrow, how you want to repay it and factors such as your business credit history. It is crucial to compare your options carefully and receive the right advice from a professional loan specialist at AusWealth. Contact today on 0425 051 126 to finance your business needs correctly.
