Short Term Business Loans – Does Your Business Need One?

Ranging from equipment loans to seeking loans for expansion and paying off stakeholders or employees, you will come across very few business identities that do not seek financial aid for maintaining a steady cash flow for their business activities. This is a phenomenon that is experienced by every business house once in a while. So, how do businesses get that extra cash they require for fulfilling their financial needs? Short term business loans can bail them out from this situation.

Applying for the loan – The preparation

Once you have identified the need for short term business loans, careful planning is a prerequisite. How will you proceed? There are a few questions that you need to work out so that your vision and goals related to the loan you are seeking is clear. It is after all, someone else’s money you are using as credit.

So, it has to be planned ahead and the expenses have to be kept in mind so that there is judicious usage of the loan proceeds. Check out these questions.

  1. What is the purpose of applying for the loan?
  2. What is the loan amount you have decided to apply for?
  3. Are you in a position to repay the loan or most importantly, do you see yourself debt free in a few years from now?
  4. How long do you intend to take the loan for?
  5. Is your business steady?
  6. Are you sure about the ROI (Return on Investment)
  7. Have you attained break even?
  8. What is the current turnover of your business?
  9. What have you decided about the collateral?
  10. Do you have collateral against which you intend to apply for the loan?
  11. How urgently do you need the cash? Can you do without it for the next quarter?

Regardless of whether you apply for the loan or not, the pros and cons of these short term business loans ought to be in your knowledge.

Pros of short term business loans

These are as follows-

  1. Quick cash – These short term loans are an excellent way to boost your business finances promptly and as these loans are disbursed quite fast, the cash flow can be maintained well.
  2. Opportunity for growth/expansion – At any point of time, if you find that your business is running short of cash but there is a great growth opportunity beckoning, these short term loans for business can be an excellent solace financially.

Cons of short term loans for business

They are as follows-

  1. Rate of interest – The rate of interest of these loans is very high. Not only that also, these loans are ‘interest only’ loans, which means you will have to shell out more in the long run. So, for startups in particular, these interest only loans can be a bad proposition.
  2. Getting into a vicious cycle of loans – If you are not in a position to repay the loan at some point of time, especially after you have made payment of a considerable amount, out of desperation you tend to take another loan to repay this off. As such, you get into a vicious cycle, which will eventually siphon you off into a debt trap.

Invoice Financing – Essential Aspects, Benefits and Drawbacks

Invoice financing is a loan that businesses seek from funding companies on the basis of the payments that customers have not made. In other words, in order to collect payment, businesses send invoice to customers. On the basis of this invoice, the business can opt for financial aid.

Invoice Finance

Putting it simply, it is a loan against the invoice, which acts as collateral or security for the lending or the funding company. This is an excellent avenue of financial aid particularly for companies that want to improve their cash flow. With the help of the cash, businesses can make payment of salaries of the employees, reinvest inappropriate avenues in areas like operations and growth.

Structuring invoice financing

Basically, invoice financing can be in form of ‘factoring’ or ‘discounting’. In case of the former, the business sells the invoices to the funding company, which in turn will make payment for 75% to 80% of the value of the outstanding invoice. This is usually paid upfront. The rest of the payment is made when the outstanding amount is collected from the customers.

In case of the latter, the business will collect the outstanding payment from customers and not the lenders. Invoice discounting can earn upto 85% of the outstanding invoice amount from the lender. Once the customers make the required payment against the invoices, the business that has received financial aid from the funding company repays the amount after financial adjustments in form of fees.

Benefits of invoice financing

Given below are the benefits-

  1. Generally, it has been observed that not all lending companies want to deal with new business identities since there is a lot of risk involved. This is because it might be a loss venture for the funding company as a startup’s flow of cash may not be consistent or certain. For such startups, invoice financing is an excellent avenue for the ball to keep rolling.
  2. With the quick disbursal and prompt loan procedure, cashflow is maintained well, which in turn might help the businesses to procure necessary equipments and tools required for the growth or expansion of the company.
  3. Startups usually face a problem of due collection. This can be taken care of by the lending company. There are many lending companies that will collect the outstanding invoice amount directly from the customers, thereby acting as collection agencies.

Drawbacks of invoice financing

The drawbacks are as follows.

  1. Many business identities have complained about the cost of the loan, which is quite significant. The yearly rate of interest may range between 12% and 60%. Aside from this the fee is between 1% and 5%. As such, unless you can maintain the collection of outstanding invoice amount and abide by the norms, you might end up paying an astronomical amount by the time, you have wrapped up with the loan.
  2. Although, invoice financing is an excellent way to lay your hands on extra cash against the invoice, it may not be appropriate for all businesses. Individuals will not benefit much from the loan concept and not all businesses might qualify for the loan process.

Debtor Financing – Will It Tame the Financial Blues?

Debtor financing is in vogue and is regarded as the main funding option for business Down Under as well as in other parts of the globe. As per reports furnished by DIFA or Debtor and Invoice Finance Association of Australia and New Zealand, this funding activity has churned out as much as $7 billion to the various businesses in Australia alone. This was the scenario way back in 2014. This funding solution is an extremely good option to access cash particularly for the smaller business entities.

In fact, experts in finance encourage and insist that accountants dealing with business clients must facilitate the procedure and also explain clients the benefits of debtor financing. This view was expressed in an article from Australian Financial Review or AFR.

While talking about debtor finance, it ultimately boils down to maintaining constant cash flow for businesses. Cash flow is of utmost importance and a failure to maintain the same has seen several business stalwarts to sink in turbulent waters. As per reports furnished by Australian Securities and Investments Commission, inadequate cash flow was one of the primary causes of insolvency in the previous years, notably in the year 2015.

As such, it is being increasingly felt that debtor financing can actually bring in some stability to the financial make up of any business entity not just across Australia or New Zealand but in other parts of the globe too.

Benefits of the concept

The main advantages are as follows-

  • One of the best advantages of debtor financing is that there are many businesses, particularly the smaller ones, that use personal assets for business expansion and growth. However, in the event the business is not able to take off, in the long run, it can compel you to abandon your personal assets. It is a huge loss so this concept comes to the rescue.
  • Allow more payment time to clients – If you have a steady cash flow with debtor financing, you are in a better position to allow your clients to make payments over extended period of time. And when you earn the goodwill, you are sure to get more orders from these clients as they get some respite as they are allowed more time for payment for their dues.
  • Debtor financing can help you to make payments well within the stipulated period of time as far as bill clearance is concerned.

Drawbacks of debtor financing

The cons are as follows-

  • This type of financing is not applicable for all businesses. This is because the business seeking financial assistance ought to have a particular turnover volume.
  • The proceeds of debtor financing can be used only for meeting the cash flow crunch if customers are making payments slowly but in case you need cash for buying equipments or for business growth, this is not the right option.
  • As compared to other avenues of financial aid, it is expensive and not all business entities can afford the same.
  • As far as the debtor ledger is concerned, the lending company takes full control of the same. This might hamper the relationship between the business and its esteemed clients.

Cash Flow Financing – Alternative Funding Scenario Down Under

If you have been watching the global financial scenario closely, you will know how gold rush in San Francisco was followed by Land rush in another state in United States Oklahoma, and it is now time for Australia to experience the rush of Alternative Funding.

Why Australia is experiencing Alternative Funding Rush?

Experts are of the opinion that there is huge potential in the Australian markets as a result of which market players comprising alternative funding providers and business owners are sitting back and watching the progress of the markets. It goes without saying that every business requires a steady cash flow in order for it to grow steadily.

As of September 2015, more than 15 alternative funders had already started operating in the Australian markets. Here we will highlight cash flow financing and the various nuances associated with the same.

How does cash flow financing work and how important is it?

Cash flow financing is basically an alternative funding example. There are several instances, when you fail to receive payments from clients, which in turn impacts the financial activities of your company, which depend on that very payment.

Non-payment usually occurs due to oscillating price of products (as per market conditions), increase in expenses and overhead costs, and last but not the least, competition, which will compel you and your team to match up to the other market players.

When a business, regardless of whether it is small or medium sized is cash strapped, cash flow financing helps to overcome the financial crunch. All you have to do is prepare an invoice and if you have settled for cash flow financing provider, send a copy of it to the alternative funding company.

Usually, the financing company will provide the funds within 24 hours or a single business working day. Generally speaking, most of the funding companies pay 80% of the total amount of the invoice. You might also come across companies that offer discount rates from time to time. While most of the companies will pay the balance 20% later, few companies lay down a condition that when your clients make the payment, you will be paid that amount too.

Qualifying factors as Australia has no FICO Score

The markets in the United States differ from that in Australia as far as working out the eligibility criteria are concerned. While in the US, the FICO score helps in determining a debtor’s repayment capacity, since the concept of credit score is not prevalent DownUnder, credit worthiness of individuals is based on the transaction history of individuals seeking alternative funding avenues.

What to expect from a reliable funding company?

Given the fact that there are so many funding companies operating in the market, settling for a reliable one is a tricky job. But it is always advisable not to be hasty in your decision. Ideally, the funding should be fast, proper record maintenance should be opted for, no hidden clauses or conditions, and last but not the least should have had a good track record in the past since the time the company has been in this business.