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    Article about fundx by david jackson

    Jun 8 2016 at 12:15 AM  Updated Jun 8 2016 at 12:15 AM Save article My small business needs $10,000 fast – what are my options?Share via EmailShare on Google PlusPost on facebook wallShare on twitterPost to LinkedinShare on Reddit

    There are ways to get through a cash flow crisis other than dipping into savings.

    by David Jackson

    Late-paying clients, a few slow weeks, multiple bills arriving at once ... these all-too-familiar situations often seem to crop up simultaneously for many business owners, creating the perfect storm of temporary illiquidity.

    And when the kitty is drained so suddenly, or simply not topped up as it should be, SME owners can be left scratching their heads, wondering where they will dig up the cash needed to continue operating. Staff need to be paid and suppliers don't deliver on promises alone.

    So what are the options for business owner facing a cash flow gap?

    Use your own savings

    Take the case of Sarah, who runs a small coffee shop in the heart of a bustling metropolis. She's entering her second year of operations, has a staff of three and a very tight weekly break-even point. After temporary roadworks block access to her shop for several weeks, Sarah has suddenly found herself short $10,000 as a result of reduced foot traffic.

    Luckily, Sarah has a rainy day fund in a personal high interest savings account she can dip into. Assuming the money wasn't intended for investment elsewhere, the cost of using this is theoretically limited to the savings rate, around 1.5 to 2.9 per cent.

    But the additional cost suffered by Sarah in this instance is the loss of security resulting from her diminished financial buffer.

    While some might consider a $$10,000 business cash flow gap exactly the type of "rainy day" this fund was set up to weather in the first place, a trap many business owners often fall into is putting their business's needs ahead of their own.

    Unexpected medical bills, theft of property or family emergencies can all necessitate fast access to cash. And if this cash has already been used up on the business, these situations can be quickly exacerbated by the additional stress of financial hardship.

    Ask friends or family

    Sarah might instead reach out to friends or family for a loan. The benefits of this arrangement include the ease of transacting with someone with whom she already has a relationship, (often) a discounted interest rate and the ability to direct interest payments to someone she cares about.

    But this arrangement obviously involves high relational risk.

    Aside from the agreed interest rate, the potential cost here is the relationship itself – particularly if she's unable to make repayments for any reason, or the terms weren't clear and misunderstandings arise.

    And though it's possible to employ this strategy without these issues complications, standard advice is to steer clear of this arrangement if possible.

    Take out a business loan

    Many business owners turn to their local bank in times of need. A positive here is that loan rates are generally mostly affordable, sitting at about 4 to 8 per cent annualised (although this doesn't include fees and charges).

    But a key issue for Sarah here would be the need to provide in-depth information about the financial history of her business, and detailed evidence of her ability to make regular repayments.

    Because she has only been in business for one year, she may not have an adequate financial history. Though she knows her weekly break-even point, she also may not yet have recovered her initial capital investment, classifying her business as loss-making.

    These red flags may prevent her from being approved for the loan. Or they may cause the bank to require some type of collateral, typically property, against which to lend to her.

    Finally, if she is approved, and doesn't mind risking her personal assets to fund her business, it can sometimes take as long as 30 days for the funds from a bank loan to reach her account. As a long-term financing strategy, this may not be an issue. But where funds are needed rapidly, this strategy may not be timely enough.

    Put it on a credit card

    Sarah may have a business or personal credit card she could use to have instant access to $$10,000 (depending on her credit limit) and continue operating, business as usual.

    But this ease of use is the precise reason credit card users can get in trouble. Credit cards are designed to allow users to rack up debt easily that can then be rolled over, month after month, if the holder isn't careful.

    The compound interest rates, calculated daily, can cause interest expenses to spiral out of control. If Sarah is unable to make repayments for some reason, she may also be surprised to note her interest rate increases automatically at one point – a fact that's probably quite well hidden in the fine print.

    So while credit cards may provide a temporary and instant respite, it's best to avoid where possible or use only as a once-off, emergency tactic.

    Use a marketplace invoice financing firm

    A different service that would allow Sarah to pay off her debtors immediately is the use of a marketplace invoice financing firm. These firms provide cash advances based on a firm's outstanding invoices, which often form its biggest asset.

    Because the entire process is conducted online, funds can be sitting in the business owner's account within 24 hours after applying.

    The difference between this service and a credit card, however, is that there is a fixed repayment term attached to the loan. This frees up the working capital of the firm, and prevents the loan extending out over many months or accruing growing interest expenses.

    Marketplace invoice finance lenders don't require much physical paperwork to make an assessment. Instead, they use complex algorithms to assess credit risk by processing hundreds of social and online touch points in seconds, and attaching to any accounting software of the firm. The cost of the loan is then calculated according to the risk level of the business, not a single number attached to an aggregated category of borrowers.

    This loan type isn't available to all businesses, however, as the algorithm can quickly assess whether a business may or may not be capable of repaying a loan. But because the application process takes just a few minutes and can be performed entirely online, it wouldn't cost Sarah anything to check whether she's eligible.

    Do nothing

    Of course Sarah could always try to hold on, hoping that a miraculous uptick in sales will materialise and bring the revenue needed to meet her obligations.

    But the "head in the sand" strategy is easily the least advised course of action for any business owner facing any problem – especially a financial one.

    David Jackson is CEO of marketplace invoice finance firm FundX.



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