"Liquidity" was a term little known to the non-financial world until two years ago when the Global Financial Crisis sucked the liquidity out of the world’s money markets.
For small business the crisis meant an end to cheap loans from banks, creating another crisis on its own. Small businesses rarely have a monetary buffer large enough to cushion against the inevitable hiccups that choke cash flow, most often a slow paying customer for a large job. So how can small businesses get their hands on money without resorting to loan sharks?
The most tempting and easiest source of debt is to use credit cards. Banks and financial institutions are often criticised for luring customers with cheap credit cards with promises such as forgoing interest for a six or 12 month period. The obvious problem is that credit card interest rates can be exorbitant, around 20 percent in some cases. A business can sink under the weight of spiralling interest payments so a credit card is a last resort.
Friends and family are another source of funds, however there is always the risk of souring relationships through misunderstandings or future cash flow crises.
Factoring may be an option for you. When a business sells its accounts receivable at a discount to a third party, it is called factoring. The business receives its funds immediately.
The factoring company takes ownership of the receivables and assumes the right to collect on them and takes on the risks of non-payment. Factoring is not a loan, so the funding firm isn’t concerned with the firm’s creditworthiness but looks at the quality of its accounts receivable. The main drawback for the business is that it doesn’t receive the full value of its receivables. This amount forfeited can be high in percentage terms when compared to traditional forms of finance.
There are more conventional sources, too. The most common business loan is an overdraft which is a limit set by the bank on the amount of money a customer can draw from a cheque account after his or her own funds have been exhausted.
Sometimes an unexpected cost - or an opportunity – breaks ground and you must scramble to find the money.
Like a credit card, an overdraft is tempting because it is a revolving loan (money paid back can be borrowed again) that can be conveniently accessed without setting up another financial arrangement. Interest is charged on the amount owed to the bank.
Overdrafts have their own shortcomings. They can be called in by the bank at any time with no warning, and extra conditions can stipulate that a percentage of the money must remain in the account.
But whatever route you decide to go down, you should contact us as your business advisor first.