Short Term Small Business Funding
Quite obviously short-term funding is designed to be used and repaid in the short term. This is often referred to as working capital finance. It is used to finance working capital and pay creditors and is then itself repaid following receipt of funds from debtors. The most common form of short-term finance is provided by banks in the form of an overdraft.
Overdrafts
Whilst overdrafts may be the most common form of short-term finance they are also probably the most abused. They are often used for purchasing assets for which long-term finance should have been obtained. An overdraft is a revolving form of credit up to an agreed limit. This limit is agreed in advance and is then available for use, usually for a defined period normally ranging from a few months up to one year. You are then free to draw on that facility as and when required.
Overdrafts do not have any defined repayment date, although the bank will normally insist when granting the facility that it is repayable in full on demand. This does, of course, mean that it can be taken away just as quickly as it can be granted.
Trade Credit
Obtaining credit from your suppliers is also another easy form of short-term finance. It can also be the cheapest form of finance. You are, effectively, using other people's money to finance your business although no interest or other charges are payable. The terms of such credit can vary widely from a few weeks up to many months and will depend, in many cases, upon the particular type of business that you operate.
Having gained agreement to a credit account it is extremely important that you do not abuse that facility. It can just as easily be withdrawn, placing severe pressure on your cash flow. Always adhere to the agreed terms of the credit and make payment promptly when it is required.
Failure to pay on time could also render you liable to penalties. Always remember that the provisions of the Late Payment of Commercial Debt Act will also apply to debts that you owe. Bearing in mind the considerable statutory interest rate, the charges involved could represent a substantial amount and are therefore something that you should avoid at all costs. Of course, if your creditors start to charge you on this basis it is also likely that they will have already withdrawn your credit facility.
Trade credit is not something that is only available to established businesses. In these times of intense competition, suppliers need to be flexible in how they make their sales. Do not be put off by an initial refusal. Try another supplier and you may get a different answer.
Factoring
A factoring service enables you to bridge the gap between sending the invoice and actually receiving payment. It is specifically designed for small businesses, usually with turnover of at least 5250,000 although sometimes lower limits are available. The factor will take over the running of your sales ledger and will issue statements and debtor reminders according to an agreed timetable.
Factoring your debts means that you can obtain an immediate advance against your outstanding debtors. This usually equates to a maximum of 80% of approved invoices. In this case, 'approved' means that the customers have been approved as debtors by the factoring company.
The advantages of factoring:
- It improves cash flow with a faster collection of trade debts.
- It removes the need to chase unpaid invoices.
- It is a simple process and insurance against bad debts may be available.
The disadvantages of factoring:
- Your customers know that you are using the factor - in some cases this does have a stigma attached to it.
- It can prove costly in overall terms.
- Once you have taken out a factoring arrangement it can be difficult to extricate yourself from the arrangement.
