Invoice Financing, Not Business Loans, Can Beat The Late Payers Threatening Australian Business
Running a business means taking charge of your future, and the rewards in terms of money, lifestyle and satisfaction are great. But no-one could claim that it’s the safe option: about two thirds of start-ups fail in their first three years, according to the Australian Bureau of Statistics. And the biggest killer is cash flow problems.
As businesses become more established, the survival rate improves. By that stage the bad ideas will be long gone, as will the lazy entrepreneurs. Quite a few good businesses will have gone under too, through a mixture of bad luck and bad clients. Slow payment, for example, is a major cause of cash flow problems.
But for those that survive, the issues around cashflow and business finance won’t go away on their own, and they remain a major cause of business failure. A study by the Australian Securities and Investments Commission found that just 33% of insolvent firms suffered from trading losses. That means that two thirds of the businesses going bust every year in Australia are actually profitable.
Some of those firms – which total thousands every year – will have been over reliant on one large client, or will have been hit by a one-off event they weren’t insured against. But many will simply have found themselves unable to finance their operations. One of the reasons for this is Australia’s late payment culture, rightly highlighted as critical by Small Business Ombudsman Kate Carnell.
Never Ending SME Problems?
An inquiry may eventually bring some relief for those SME owners being forced to wait months for payment from their bigger, corporate customers. But the problem of managing a growing, successful business’ finances won’t go away. The fact is that, unless you want to risk the future you’ve worked so hard to build, you need to take cash flow management seriously.
When faced with the need to ensure adequate funds in their account in order to avoid running out of money at a crucial time, many businesses turn to the bank and seek a business loan. But these are only a short term solution and can actually make cash flow problems worse in the long term: on top of everything else, you now need to make a repayment every month.
Needless to say, the culture of late payment doesn’t apply to repaying your bank and they can be particularly unforgiving creditors. Unsecured business loans from online ‘alternative’ providers are usually worse – they may be quick to set up, but the repayments are also immediate, high, and typical interest rates are eye-watering.
Debtor Finance, the Solution
When protecting themselves against the biggest killer, businesses would be far better to use one of their own greatest assets: their accounts receivable. This is the principle of cashflow finance, or debtor finance as it’s sometimes known.
As a way of sidestepping late payers, a business can use invoice discounting to access most of their money upfront, long before the bill is paid. Factoring is an even more thorough way of ensuring your cashflow is regular, as a business factoring company effectively takes over your sales ledger.
But whether you choose factoring finance or the more flexible option of invoice discounting, by gaining control over your accounts receivable you can ensure the money that is supposed to be flowing through your business really is there when you need it. This is an effective way of protecting your business from nasty surprises, and ensuring that you continue to reap the rewards you deserve as somebody who runs a business in the Australian economy.