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Is Your Business Surviving On Credit Card Debt?

The SME sector is booming in Australia. Employing 68% of Australians and producing 55% of the country’s total income from industry. So you would think SMEs have their pick when it comes to financing, but you’d be wrong. In fact, in a recent research paper by Commonwealth Bank Small Business Study it was found that out of the 500 small business owners surveyed, almost half (44%) relied on their credit cards as a “primary tool to manage cash flow, working capital and business investment”. I know, sounds crazy right?

The glamourous notion of running your own business can very quickly come crashing down around you when your outgoings exceed your income. In the early days this is almost a certainty. Even when you’re further into the lifecycle of your business there can be financial hiccups, one example being late payments. Surprisingly (or not surprisingly, when you take a look at our culture) Australian debtors have been identified as being the worst in the world.

It’s understandable, especially in the early days of a business, that you will bend over backwards to secure that next contract or reduce the margins to compete with more established businesses and get your name out there. But sometimes you need to draw a line. Kate Carnell – The Australian Small Business and Family Enterprise Ombudsman said “the majority of small business failures are by far a result of poor cash flow, with slow payments from customers or clients, a leading factor”.

So what’s the answer? How do you avoid financial failure? Disaster? Catastrophe?

Every business is different, and so common sense would dictate you use the solution that best suits your business. That being said, here’s 3 feasible options for your SME:

Bank Loans

I know, I know, it’s not exactly ground-breaking stuff, but bank loans are the bread and butter of getting finance. Bread and butter in that they’re not particularly exciting, but every bank offers them. As a business, you’re going to face some issues when it comes to getting a bank loan; generally, you need a two year trading history to secure your loan and even if you have that then you would be required to put up everything you own as collateral. If you meet the criteria and shop around you can get a competitive rate (again, this depends on your personal set of circumstances), and provided you keep up with the repayments they can be a viable option. But what if you are a start-up? I know what you’re thinking, you’re thinking “I don’t have a two year trading history, and I’m not willing to gamble all my stuff as collateral”. But don’t turn back to your credit cards just yet.

Equity Funding

Have you ever watched Dragon’s Den? This is basically that. Essentially what you’re doing is giving away a share of your business (and with it, future profits) in exchange for the funding that you need. This has its benefits; a large enough share of your business will usually result in the active input from your new partners (dependant on your choice of investor), and the benefit of their added knowledge. But, as with anything, this also has its downsides; give away a big enough share and all of a sudden it’s no longer your business. ‘You’ becomes ‘we’, and you might not be ready for that kind of commitment. You also might be surprised by the value of your business. Any investor worth a damn is going to be able to do some quick calculations and figure out the dollar value of your business, and the percentage they request for their investment is going to be based on this. You could have to give away a lot of equity for what you feel isn’t a lot of money. If this level of commitment is starting to scare you don’t worry, there are yet still options for you to consider.

P2P Invoice Finance

Peer to peer lending is becoming more and more popular, with Morgan Stanley predicting P2P lending to small businesses growing to $11.4 billion in the next five years. Peer to peer lending offers businesses an alternative to traditional finance options such as bank loans. The lending takes place through an online platform which connects borrowers looking for capital with individuals looking to make higher returns from their money than is achievable from a saving accounts. Invoice finance is a niche variation of this. It enables businesses to get advanced payment on their customer invoices – giving them access to funds which would otherwise be tied up until the payment due date. Basically, you get to access money you’re already owed, just sooner than you’d get it if you waited for your debtors to pay (especially the Australian ones). It also doesn’t rely on you having a big trading history, as it is calculated on the invoices you’re owed.

An invoice finance platform like Timelio has other benefits. Once you’ve signed up to their service (free, I might add), you can upload your invoice, decide what percentage of it you’d like to sell, and, once approved, have your funds within 24 hours. That’s right, 24 hours, not the 30, 60, 90 or even 120 days of your invoice terms. The auction format that Timelio uses ensure you get competitive market rates specific to your business and debtor, and with no sign up fees, no account fees, and no lock in contracts you’re looking at one of the most cost effective ways to get finance.                                                                          

To find out more about why invoice finance is a better alternative for your business, call 1300 FUND ME or contact us.

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