Business Finance for SMEs: Cash Flow Solutions For Growth

One in three Australian businesses have access to working capital that would allow them to survive only three months.

With greater pressure and strain on cash flow than ever before, Australian businesses are seeking alternative finance solutions to manage cash flow. When cash flow is pushed to the limits, businesses are exposed to unnecessary stress and strain. 

Financial stress can have long-lasting effects on a company’s growth and performance, so finding a solution to improve working capital and cash flow is essential.

One thing that few business owners realise is: it’s often more profitable to secure business finance from someone other than their bank. Sometimes referred to as alternative lending or non-bank funding, alternative lenders can offer tailored cash flow solutions for both long-term and short-term lending.

Whether you are looking for business finance for the long-term or short-term, business growth or expansion, there is a range of business finance solutions available that can help you get on with running your business and achieving your long-term business goals and objectives.

Here we outline a range of business finance and funding solutions you should consider to address cash flow barriers.

What are the options? Equity Finance and Debt Financing

Equity finance and debt financing are two of the main types of business finance available.  We’ll take a look at each of them and how to identify if equity finance or debt financing is the right financial solution for your business.

Debt Finance

• Term Loans
• Invoice Finance
• Revolving Credit Facilities
• Cashflow Finance

Equity Finance

• Business loans
• Investments/shares
• The Equity Finance Process

Our Recommendations

• Invoice Finance

Debt Financing:

Debt financing is used when a business requires cash upfront and repays the loan plus interest over an agreed period (normally 12-60 months).

Australian banks generally apply strict borrowing criteria and often require collateral such as personal assets or the assets of the business.

Debt financing through banks is notoriously hard to access for small businesses due to stringent criteria, this has created a unique opportunity for alternative lenders like TP24 to provide flexible funding for SMEs with low-touch admin that can scale. 

How Does Debt Financing Work?

Debt finance is a form of business finance lending where a company raises money from a lender to meet cash flow requirements. Lenders repay the loan via interest payments during the repayment period, which can be typically between 1-3 years.

Types of Debt Finance

Debt finance comes in a range of forms, which includes the following:

Term Loans: 

A term loan allows access to money for a set period (normally 12-60 months). Repayments are paid each month over the term of the loan. The benefits are that you can fix your repayments over a set period, however, the disadvantage is that you are still exposed to potentially volatile market rates and may require personal collateral as security.

Invoice Finance:

Invoice finance is an alternative form of debt financing, which uses outstanding invoices as collateral for cash advances. With this particular type of business finance loan, interest repayments are made when the borrower receives payment on their invoices.

Invoice finance can be used to manage cash flow and provide alternative funding solutions for SMEs. It is a cost-effective alternative to other forms of debt financing such as term loans and overdrafts, that doesn’t require personal collateral however it does require you to have an outstanding invoice that meets the lender’s criteria.

Revolving Credit Facilities: 

Revolving lines of credit are also called revolvers in the world of business finance. They allow for drawing of funds as they are required up to the credit limit available with the lender. This means that customers can access cash when required, paying it back over the same time. The benefit is flexibility, however, you are still exposed to potentially volatile market rates.

Cashflow Finance:

Cashflow finance is alternative debt finance that provides SMEs with working capital loans. Working capital enables businesses to buy raw materials and continue day-to-day operations without the need to resort to alternative debt finance such as overdrafts or term loans.

Cash Flow Advantages of Debt Financing

The main advantage of debt finance cash flow for SMEs is that it provides a business with a cash flow boost. This means a business has access to secure funding they can use to manage ongoing operating costs, expand their business abroad or invest in whatever way that will be of benefit to their business. 

A line of credit allows companies to access money when it’s needed, therefore converting money tied up in working capital to become available for more productive uses. There are several alternative debt financing options for companies so it’s important to tailor alternative debt financing to your business requirements.

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Equity Finance:

Equity finance is a form of business finance that uses the value of a business as collateral rather than traditional forms of borrowing such as personal assets. In return, alternative lenders offer businesses upfront cash with lower interest rates and longer repayment terms (normally 24 months-5 years ). 

Equity finance is ideal for capital-intensive businesses that have significant assets or those that generate regular income and funds that allow them to repay the debt.

Equity finance can provide alternative quick and flexible cash solutions for SMEs, however alternative lenders may require a larger equity stake in smaller businesses, which may put a small business at significant risk.

Types of Equity Finance:

Equity finance can come in two forms, which includes the following: 

Business Loans: 

Alternative lenders will provide capital for business needs up to a set amount of money. You need to repay this loan via regular fixed monthly repayments over an agreed term period (normally 24 months-5 years).

Investment/Share:

In this particular form of equity finance, a lender can invest in your business by buying shares in your company. In return, the alternative lender gets a fixed rate of interest and dividends from the company so it’s important to ensure you have a business plan that highlights how the investment will provide a positive outcome for both parties. Equity finance is attractive to lenders as the interest rate is less than what you would pay on a personal loan and repayment terms can be longer (normally 24 months-5 years).

The Equity Finance Process:

Equity finance is not an easy finance option to get. You need to have your business financials in order, which requires having tax returns prepared for the previous 2 years. Lenders will require proof of profitability and growth, which may include proof of assets or land ownership. Equity finance is normally only offered to business owners with over 50% share in the company otherwise you need to be prepared for a lengthy application process.

Debt Finance vs Equity Finance: Which Type Of Business Financing Is Right For Your Small Business?

Evaluating the costs and benefits of both debt financing and equity financing options for your small business is essential to ensure you choose the type of business finance that best suits your needs.

Equity finance is more expensive than traditional forms of debt finance, however, it offers greater flexibility as businesses can use their assets as collateral. Equity finance also.

Does Equity Finance Work for Small Businesses?

Smaller SMEs may also be able to provide alternative finance using business assets as collateral. This is where alternative lenders may purchase a percentage of your assets, such as invoices or the assets of your business.

Equity finance is likely to have relatively lower interest rates and longer repayment terms when compared with debt finance. However alternative lenders will be looking for businesses that can pay back debts even when times are tough.

What We Recommend:

Invoice Finance: The Dynamic Business Finance Solution for SMEs

Many businesses face lengthy payment times between 30 and 190 days, this causes business cash flow to get stuck in a loop.

Invoice finance is a business funding solution that business owners can use to free up cash flow and fund business expenses. With invoice finance, business owners sell their accounts receivables (invoices owed) to invoice finance providers for a cash advance.

Over the past years, invoice finance has gone through a fintech makeover. This digital shift in gears provides more flexibility, less admin, and faster access to a business’s accounts receivables than ever before.

Innovative companies like TP24, are changing the game of business finance for SMEs. With TP24, SMEs can access scalable, fully digital business funding.

Free up cash flow with TP24’s flexible invoice finance 

Over the years, alternative lenders like TP24, have sought to reinvent the roadmap of debt funding with our fully digital, flexible line of credit invoice financing. Invoice finance is similar to an overdraft, however is more accessible and invoices can be paid early without penalty.

Invoice finance is one alternative finance solution that works great for cash flow, helping businesses reduce the time it takes to pay their suppliers and invoices which often results in more favourable payment terms.

If you’re looking to free up your working capital, support your business growth, or expand domestically or internationally, alternative lenders like TP24, are changing up the world of business finance for SMEs.