Financing your business

At times managing cash flow can be a tricky balancing act. A business must be sure its cash flow cycle is strong enough to support its day-to-day operations as well as its growth plans.Therefore it's imperative you have the right type of funds available when they are needed.

Unfortunately sometimes it doesn't matter how you prepare, there will come a point when the balance shifts and your cash flow situation is precarious. A good business will have finance in place to safeguard against these types of shortfalls.

There are a number of funding options available and the best way to decide what is right for your business is to assess your situation and get as much information as possible. Having an emergency credit card or overdraft facility might be the way to go if you're short on cash, whereas a loan might be appropriate for expansion. It's important to weigh up each option carefully as they all have advantages and disadvantages.

For most financing options you need to approach the bank or financial institution before you require the money. It is important to realise that all of these financing options will require the financial institution (whether one of the big banks or a small credit union) to check your individual and business credit report before approving finance. So before you go to the bank, check your credit reports so you know where you stand. Visit www.dnb.com.au to order your credit records.

1. Credit cards

Believe it or not credit cards are a versatile option - they can be useful in an emergency and they can help to streamline your cash flow.

Advantages
Credits cards can be a great and quick way to get yourself out of a tight spot, but only if you know you will receive funds in time to pay off the balance of the card by the due date. If you have an emergency credit card on hand, you don't have to deal with banks when you need that extra injection of cash.

Credit cards can also help to streamline your cash flow as they can provide any easy way to separate your personal and business expenses. It also enables you to effortlessly track your business expenditure as you will receive an itemised list of expenses in your mailbox each month with no effort on your part. If you do plan to use your credit card regularly, look into additional benefits like reward programs and incentives.

Disadvantages
Never forget that when you spend on credit you are effectively borrowing money so you need to ensure you don't overspend. To get the most from your card you should aim to pay it off in full each month. If you fear you won't have the money to settle the account in full, don't use the card!

Credit cards have high interest rates and will start accruing interest as soon as the due date passes. Also, if you don't pay it off in full by the due date you will be hit with overdue fees. It is also important to regularly check your statement. Credit card fraud is not uncommon and you don't want your business to be hit. If you notice any discrepancies, speak to your bank immediately.

Finally a credit card comes with an annual fee so, particularly if you are using it as an emergency card, you need to weigh up whether the annual fee is worth your peace of mind.

2. Bank overdrafts

An overdraft is effectively a short-term funding option which allows a business to access more money than is in the bank. It provides a firm with working capital to help the business survive cash shortages.

Advantages
You set the facility up when you establish a bank account so you don't have to go through any kind of approval process before getting access to additional funds. Having taken the time to set up an overdraft at the outset of your banking relationship means you can access the funds as and when you need them.

Bank overdrafts can be more cost effective than using a credit card, which is particularly important when you are short on cash. An overdraft limit is also flexible, allowing you to easily adjust it as and when required. In some cases you can even request an immediate overdraft limit increase over the phone or online to ensure you don't over-step your limit in emergencies.

Disadvantages
Bank overdrafts are designed for short-term financing rather than a permanent source of funding. As such, you should aim to bring your account back into credit as soon as possible to reduce charges. If you leave the account in overdraft for too long your interest charges will stack up.

To be approved for an overdraft the bank will assess your cash flow, the timing of receipts and payments and seasonal sales trends. If you exceed the pre-determined limit you will be hit with a surcharge or the bank will refuse to pay.
Also, depending on the size of the overdraft, the bank may request some form of security, like a fixed asset or personal guarantee, which you will be putting on the line should you fail to pay the overdraft back.

3. Bank loans

Bank loans are another good financing option, particularly if your business is seeking to grow or expand. If you take out a business loan with a bank you will receive a lump sum amount from the lender which you pay off in instalments over a fixed period.

Advantages
Bank loans provide a more structured approach to financing. All the terms and costs are laid out before you sign on the dotted line. You will be aware of the length of the loan, the amount of the instalments and the interest rates - there is
little room for change.

The variety of loans available and the range of lenders - from the Big 4 banks to the local credit union - can make the prospect of selecting a loan daunting. However, this also provides a business with a multitude of choices when it
comes to selecting the most suitable loan. Consider all the options before settling on one - secured or unsecured; fixed or variable; bank, financial provider or credit union.

Disadvantages
The approval process for a loan can be long and arduous, particularly if you decide not to go with your existing bank. Unfortunately, it means you will not have access to the funds immediately. This can cause problems if the business is taking out the loan to cover a short fall in cash.

The loan will also be for a set term so you will have to continue to pay it off irrespective of how successful your business is or whether it suffers difficulties in the future. It's also important to note that a secured loan is backed by collateral, which means your assets (what you have provided as collateral) could be under threat if you default on
your loan.

4. Leasing

To purchase new equipment, like a car or computer, a lease might be the way to go. With a lease agreement the finance provider purchases the asset and leases it to you over an agreed period. At the end of each lease the ownership transfers back to the finance provider so the business can buy the asset, renew the lease or simply return
it.

Advantages
A lease agreement allows you to regularly update your equipment without a large up-front payment. Up-to-date technology and equipment can increase productivity and the regular payments free up working capital for other
business purposes.

There are also a number of tax benefits to leasing as payments are deductible as operating expenses. However, you need to consider whether this outweighs the tax advantages with depreciation. The lessor (finance provider) owns the equipment so they are responsible for unexpected repairs and maintenance costs. This means you don't have to worry how long the asset is out of action if it is damaged.

Disadvantages
The equipment is not yours so at the end of the lease, you either need to pay a lump sum for the equipment sign another lease or give up the asset.

A lease is a legal obligation so you can't cancel an agreement without having to pay a penalty. If your business comes into hardship or you cease the operation that required the equipment, you may be up for large exit fees.

There are a number of leasing options available so you should speak to your financial planner if this is something you are considering for your business.

The right financing can help your business expand or overcome a shortage in cash. However, each financing option is preferable for a particular situation and there are a range of products on offer in each category so you need to do your homework before you sign the dotted line.

If you are still unsure, it is wise to speak to your accountant or financial planner to obtain some specific advice.

Note: A common mistake many SMEs make is financing their business using personal finance rather than business finance. You should always try to separate the two so if your business does experience financial problems it won't effect your individual credit file.

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