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According to Andy Williams, we are approaching the most wonderful time of the year. From a financial perspective, that is certainly true for the big retailers who are now in full Christmas flow, but for other businesses, it can be another story. The festive season presents the potential for increased sales, but it also puts stress on cashflow if you need to make larger stock orders and use additional warehousing or storage space.
Add to that the fact that B2B clients are often slower to pay due to the Christmas shutdown period, and it becomes clear that this is a time at which you need to be more on top of your cashflow than ever. There are plenty of financial tools available to help you do so – which ones are best for you?
Business loans
A short-term loan is the most straightforward solution, and if your business is stable and has a full order book, it can be cost-effective, too. Short-term can be just that – many financial companies offer loan periods of as little as three months. Just make sure the loan agreement is clear about repayment terms. Ideally, try to be as flexible as possible, so that you can repay as much as possible as soon as possible.
Invoice finance
This is a form of finance that is becoming increasingly popular, and it is particularly handy when your payment terms allow customers 30 days or more to settle their invoices. The lender provides money on the basis of the outstanding invoice amounts, and pays an agreed amount – typically around 80 percent – instantly. When the client pays, you receive the balance, less the finance company’s fee. The beauty here is that the loan depends on the creditworthiness of your customers, not your own business. So for startups, or those with a less than perfect credit rating, it can be a compelling choice.
Revolving credit
At home, we hit our credit cards a little harder at Christmas than at other times, and a revolving credit facility allows your small business to do the same thing. The company is offered a set credit limit, and can draw money to use as working capital whenever it needs to. With the credit facility in place, there is no delay – the money is there, a little like an approved bank overdraft facility, whenever it is needed. The potential downside here is that interest rates can be on the high side, so it is essential to shop around.
Which one works for you?
These are just three of the most popular mechanisms that businesses use to acquire a short-term cash injection when they need it most. Choosing the best option depends on a number of factors, including the amount you are likely to need, along with the health, maturity and stability of the business.
The most important thing is to look ahead, weigh up the options and get the right safety net in place before you actually need it. That way, you are thinking objectively and strategically, and will be able to arrive at the most effective and cost-efficient solution.
