Improve the cash flow of my business
Published by MFAA
If you're running a small business, one of the biggest problems you face is cash flow. Here we look at some of the ways in which you can improve the cash flow of your business, including:
- credit cards
- cash flow financing (factoring, debtor finance or invoice finance)
- trade finance or stock finance
- car leasing
- equipment leasing
Overdrafts - traditional but declining
The traditional way for a business to improve their cash flow was to run an overdraft. However, you're charged a fee to get an overdraft and ongoing fees to maintain the facility. Also interest rates on overdraft facilities tend to be higher than for residential home loans. With more flexible business finance products emerging, overdrafts are becoming a less popular way to address cash flow issues.
Credit cards - expensive money
Credit cards are easy to get, easy to use, and can be a good way to finance and monitor employee business expenses. However, they are generally not the most economical way to deal with cash flow problems. The interest rates on credit cards tend to be higher than for residential home loans, and you can quickly get in over your head. There are other specialised ways to improve your cash flow.
Cash flow financing
You've done the work and sent the invoice but you don't have the money.
Cash flow financing is a form of financing in which a company's expected cash flow is used as security against the loan.
Cash flow financing can take different forms for example invoice financing (also referred to as factoring, debtor financing or invoice discounting) where the customer receives a loan secured by the future payment of their invoices.
Trade finance or stock finance
If you've bought stock, it can be some time before the finished goods are sold and this can have serious cash flow implications – particularly for importers and exporters.
With trade finance (also known as stock finance, inventory finance, export finance or import finance), the lender gives you a percentage of the money against the stock you've purchased. Again, you pay for the service but it can make all the difference in cash flow terms. Lenders are much less inclined to loan money for stock sitting in the warehouse than they are for confirmed orders.
Car leasing and equipment leasing
For many small businesses, leasing cars, computers and equipment is preferable to outright purchase because it improves your cash flow.