Out of the many factors that can lead to the failure of a business, negative cash flow and lack of finance certainly rank high on the list. The money that flows in and out of a business during a month is known as its cash flow. Problems begin when more cash flows out than comes in and this is the time when corrective action needs to be taken.
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What is Cashflow Finance?
Cash flow finance is an unsecured business loan which is offered by lenders to businesses in the form of a line of credit, term loan or working capital loan. Such type of finance is best suited for companies that need to invest money upfront in order to increase their revenue. It is also suitable for businesses who can show that their cash inflows have grown steadily.
The providers of cash flow finance gauge the ability of a business to handle additional debt once it has cleared all debt obligations and their existing cash inflow should demonstrate their ability to repay the cash flow finance which they have applied for. The repayment terms differ from provider to provider and generally include monthly, bi-weekly, or weekly payments.
What does cash flow finance do?
A mere glance at the business statistics should be sufficient for you to learn that cash flow is an indicator of the wellbeing of a business and it is possible, to an extent, to judge the condition of any small and medium sized business by taking a close look at its cash flow.
Many businesses are unaware of the possibilities that can be realised, if they take advantage of the various market solutions and how they can help businesses manage their cash flow effectively and gain a competitive edge over rivals.
When the cash flow of a company is positive, it has access to business capital which can be used to fund or expand its operations. There are various benefits of improving cash flow such as an increase in the ability of a business to pay money upfront and avail early settlement discounts, as well as bulk discounts for buying raw materials in bulk quantities.
Besides availing discounts, it can result in improved relationships with suppliers who you no longer delay paying, and it saves the extra time and effort that you previously invested in managing cash flow issues. All these factors, along with many others, eventually increase your company’s sales and revenue.
How does cash flow finance help a business?
The following are some of the biggest advantages of availing cash flow finance:
Improve your debt turn
Making late payments, even if they are only a few days overdue, can severely impact the ability of a business to inject cash into growing profitability by taking sales initiatives.
Let us take the example of a business which is able to generate an annual turnover of £6 million. A three day increase to debt turn, at the rate of 10 percent per annum, amounts to an increase of £5000 in interest costs that need to be funded. This can mean closure for many SMEs.
Invoice finance solutions which provide a credit control function can cut down this risk significantly and allow businesses to save money and put it to better uses such as investing in activities that drive value for the business.
Quick access to money
In the modern business world, agility has become a buzzword and it is not without good reason. In this competitive world, any business that wishes to outperform its competitors must possess the ability to swiftly respond to new opportunities such as delivering a project, acquiring a competitor or pursuing a lucrative export contract.
There are many alternative finance providers who can provide a business at least 80 percent of the value of its invoices in under 24 hours. The remaining 20 percent of the invoice’s value is made available to a business when the invoice is paid in full.
Cut costs relating to accounts receivable
All businesses need to have a dedicated and efficient receivables function. Smaller entities may find it difficult to fund such a function internally. Letting expert invoice financiers handle it for you comes with the benefits of prompt debt repayments and improving debt turn.
As most other businesses are still entangled in managing this accounting function, adopting such a strategy can give you the opportunity to improve your service and strengthen your trade relationships.
Innovate
Innovation, and research and development (R&D) are the backbone of any growing business. It helps a business in its pursuit of better market opportunities and gives it an edge over its slow-moving competitors. With more cash, you can set aside a greater percentage of your budget for taking new initiatives which can increase your revenue in the long run.
Sharpens your focus
Any business that aims for growth must improve its customer service and pursue product development with the ambition of driving value. If you wish to excel in your chosen market, you need to be able to focus on such initiatives and cash flow finance can be the strategic weapon that can bring about the change.
As you no longer have to worry about dealing with cash flow issues, you have more time on your hands to focus on improving your current operations and expanding operations in the future. You can complete assignments on time and be able to afford many other upgrades.
Increased trust
The confidence that cash flow finance brings to a business becomes clearly visible in its every action. As the operations become further stabilised, your customers will realise the ease with which you can fulfil commitments and this in turn will increase their trust in your company. This will encourage them to give you more business as they know that they can rely on you. You can add new operations to your existing ones and provide a range of services making you the one stop solution for all your customer’s needs.
Besides the advantages listed above there are many others which make cash flow finance an excellent option for businesses who find themselves struggling with a cash flow issue.