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What Are Some Effective Strategies To Help With Cash Flow?

Updated on December 2, 2017

In the current financial market managing cash flow for the everyday running of a business no matter how big or small can be a challenge. With, start-up costs, wages and tax, not having enough cash to maintain a business as well as fund possible growth can often be a company’s downfall. So if you have a viable business, but there are late payments causing your business to falter, what options do you have? For most new business owners, operating at a loss or not making substantial profits within the first few years is normal, but what can you do to ensure healthy cash flow?

Would A Bank Loan Be An Option?

A bank loan could be one solution to businesses with cash flow needs. It provides an injection of cash to cover overheads until profits can begin to filter back into your cash flow.

So why a bank loan?

  • Can give you a large cash injection, before you hit any trouble.
  • Allows you to cover costs if you are struggling, or if you want to invest in other areas of the business.
  • Can stay in regular contact with your bank manager, who can continually give sound, strategic advice.

Small business bank loans often have fixed interest rates agreed with by the lender beforehand. But these rates can depend on an assessment of risk factors and how much cash the business needs. Understandably banks don’t like high risk situations for any business, so if your business has historically had problems or for a new start-up company, security would usually be required. However, if you do provide security, normally you can expect to pay a lower interest rate.

Banks will need to know exactly how much you need, how you have come to that conclusion and most importantly, how you have calculated you will pay them back. It’s essential that you are confident in yourself and your ability to pay the bank back, as if you are unable to keep up with payment plans any security you have given could be at risk. As a business owner, it’s important not to take out too little or too much credit. Preparing a cash flow forecast will help you to carefully plan out a projected income and ensuring that you can cover repayments over the period of loan.

For SME’s, securing a bank loan in the first place can be difficult. Applications for a loan can be lengthy procedures which need a lot of admin and time, with most banks needing at least two years’ worth of company accounts. This can be a major problem if you are in quick need of a cash injection. Banks maintain that they are happy to lend, but to realistically to secure a loan you need an exemplary credit history and you need a quality, sustainable business model.

Why Invoice Financing Is Great For B2B

Invoice financing can offer a different, potentially more sustainable option than bank loans. Essentially invoice financing allows you to borrow money against your own outstanding invoices, so for businesses in need of help with cash flow it can be a much safer option, as you only borrow what you are already owed. As you are waiting for unpaid invoices it allows you to solve cash flow problems, giving you a greater safety net and possible re-investment opportunities. This option is only available for B2B companies which use invoices.

So what are the benefits?

  • Only borrowing money you are already owed.
  • Speeds up your collection plan and ensures you get invoices paid sooner rather than later.
  • Free's up more time as a business owner, meaning you can focus on other business needs.
  • A quick process, which means you can have an early injection of credit.

If you are a cash business, there will be no invoice asset available to gain money from. It could also be argued that as you don’t need to wait for payments, your business should already be cash-positive. This is why invoice financing is only readily available in certain sectors.

Factoring usually involves the factoring company chasing up your invoices for you, which can essentially take a lot of pressure off business owners, giving them greater focus on other business matters. Some businesses are hesitant to use factoring as they prefer to undertake their own credit control and the fact that they are factoring is not concealed. Both these issues can be addressed by using confidential invoice discounting, but generally this is only available to larger, established businesses.

Can Business Overdrafts Work?

A business overdraft is provided to ensure that companies have extra funds, beyond their normal needs to cover cash flow cycles in a business. Just like any normal overdraft, a business overdraft is arranged in advance with the lender, with an overdraft amount set for a period of time. As soon as the overdraft is set and the business bank account goes below zero, funds will be readily available for the business up to the pre-agreed limit.

So what are the benefits?

  • Easy to set up provided you pass the bank's risk assessment.
  • You don't spend more than you need too.
  • You only spend what you need and only pay interest on the daily balance of your overdraft account.

For businesses struggling with cash flow it can be a very quick and easy way to get a safety net, ensuring that you can cope with any problems. The amount available will depend on the business’s coupled with the bank’s assessment of the risk. A business will have agreed interest rates and repayments on overdrawn money with the lender beforehand.

When agreed with the bank, an overdraft is flexible and you only pay interest on the daily balances you are in your overdraft (not the overdraft limit). This can make it a more cost-effective answer than a bank loan or invoice finance.

These are just some of the solutions to businesses irrespective of size who need help sorting out their cash flow issues. There are lots of factors any company needs to consider, before planning on which option is the best. With so much financial uncertainty in the current markets maintaining cash flow is essential for any business.


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