One of the biggest impediments to the growth of a business is not having sufficient cash to support the increase in activity. A business may require additional funds to cover everything from higher wages, increases in debtors and stock levels, additional plant and equipment, and a general increase in business overheads.
The type of finance used to fund business growth may be very different from that used for other purposes. As with any form of financing, it is important to match the finance facility with the purpose, to ensure that it does the job it is intended to do.
If your business plans to build additional premises such as a warehouse, you may need to consider your long-term financing arrangements. Cash flow and working capital needs will require a totally different approach. One of the more common pitfalls is that a business could tie up its cash flow by not matching its need directly with the right financing solution.
While many businesses will fund their growth using a bank overdraft or bill facility, these are not necessarily the best options.
Ideally, the finance facility used to provide the cash flow that a business needs to grow should have the following features:
- the flexibility to increase automatically as the business grows and requires increasing amounts of working capital
- the flexibility of a come-and-go feature to match the cash flow of the business
- the ability to draw down as and when needed on short notice
- a cost structure allowing for interest and charges only on the funds used at any time
- the ability to accelerate cash flow.
How to finance growth in your business
One of the most effective ways to address this financing issue is to leverage the current assets of the business by using commercial debtor finance facilities.
There are a number of different types of facilities within this category.
Debt factoring
This form of finance has been around for many years and has been used widely in Europe and the United States. It was traditionally a popular finance method in the garment industry in these markets but since then has been used far more widely in the general business community. In Australia, some stigma has become attached to the product and it has been far less popular as a means of providing cash flow finance.
Receivables and inventory loans
This is a loan secured against the value of your debtors ledger and may also include inventory. The lending margins will generally be significantly less than that available under a commercial debtor finance facility for debtors. A different margin again will probably be set for inventory. The quality of the book debts will need to be high and the financier will require regular reports on the value of the security. They will also require some auditing procedure to regularly confirm that the value and quality of their security continues to support the loan.
If your business is expanding with new or increasing sales to overseas markets, a number of finance products are available specifically to cater for export sales.
Trade finance or export debtor finance
Trade finance, or export debtor finance is another option open to businesses needing cash flow to finance expansion/sales growth.
Trade finance:
- ensures your cash flow keeps pace with your growing export sales.
- enables you to export with confidence, knowing that you can be protected from the risks of bad debts
- generates cash flow to fund further sales and growth, while offering extended terms to your export customers
- delivers the convenience and competitive advantage of being able to offer open account terms
- usually provides access (via overseas branches or affiliated banks) to international credit control expertise to help collect debts effectively and efficiently
- can be with or without credit protection depending on your needs and spread of risks
- allows you to conduct your own collections or use the bank services to assist.
This article originally appeared on the Ask Us How website. NSW Business Chamber Members can access this site, which features hundreds of practical articles and other resources to help you manage and grow your business.
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