There was a time when every Australian SME had a business overdraft. They were widely available and because interest was payable only when the company was ‘in the red’, they were considered a relatively cheap source of short term business finance.
However, many businesses which were reliant on their overdrafts for cash flow have started to realise just how expensive and tenuous this approach can be.
For companies which use their overdraft as a financial safety net – there to occasionally fill in the gaps in cash flow – a business overdraft can indeed be a cheap option. However, these occasional users may well find the facility withdrawn at short notice if the bank feels it is not worthwhile to provide it. Indeed, they could also be withdrawn when there is a general view at the bank that the particular business sector is or may be in decline; or because the banks’ exposure to a market segment is outside its risk profile and the bank considers the security provided insufficient.
For those Australian businesses who regularly rely on their overdraft to finance important purchases from their supply chain, the hazard of sudden withdrawal or reduction of limits is much greater. They could find themselves suddenly unable to acquire receivables, causing operations to rapidly grind to a halt.
Many of these businesses spend most of their time in the red, despite being perfectly profitable. For them, their business overdraft has become a very expensive business loan. For these businesses especially, ditching the overdraft makes a lot of sense.
Alternatives to the business overdraft
Obviously, a business wishing to get rid of its overdraft could simply take out a business loan. If this is secured against assets, it may well be a little cheaper than trading in the red all the time. And thanks to recent efforts by the Small Business Ombudsman, in Australia at least there is less chance of seeing your credit line summarily withdrawn without reasonable justification. However, this approach would simply be swapping one form of conventional, expensive business lending for another. And a business loan means committing to regular repayments which can actually create a cash flow problem – as we explained in an early post. It is also worth noting that when a loan is described as “unsecured”, the interest rates charged are very high.
Instead, a business which is trading successfully can tap into an under-used resource at its disposal – yes that’s right, “a business trading profitably”: it’s your accounts receivable. Generally speaking, a trading business will have a number of invoices outstanding at any one time – not because its clients are unreliable, but because your business has offered trade terms from 30, 60 or even 90 days after receiving the invoice. It is only because of this issue that many profitable businesses go into the red or look for a solution by entering into costly debt – costing them a small fortune in interest and fees. This approach offers nil flexibility, particularly where an invoice is disputed or worse, the client has gone into liquidation. It can also compound the cash flow problem.
Take charge of your cash flow now
Invoice finance provides a way for trading businesses to take charge of their cash flow and manage it to their advantage. They can quickly raise cash flow over their invoices with a company like tim, which will advance them most of the cash straight away.
In doing so the business can avoid all the headaches of non-debtor payment, disputes, and a constant drain to service a loan or overdraft. And it is all online, covering off reporting, default risk and stress.
Either way, huge cash flow benefits can be unlocked: not only will the company get rid of its business overdraft and unnecessary expensive loans, but it will also have cash up front for investment. Correctly implemented facilities, like tim’s Accelerator Funding, provide a line of funding enabling the business to negotiate great terms with suppliers for COD terms.
Correct utilisation of your ledger can remove the cost of running a cash flow facility: Smart funding solutions which were until recently the exclusive domain of the Big End of business are now available to Australian SME’s, and all at a touch of a button.
Business overdrafts are a comfort blanket. But with innovative invoice finance solutions, and a number of other highly personalised and flexible cash flow finance options from tim, there’s no need to hide anymore. Businesses can get out there and start confidently growing their profits, with funding to match their successful trading profiles.