HOW TO MANAGE WORKING CAPITAL WITH DEBT – SHORT-TERM CASH FLOW FINANCE

In the previous edition of this working capital series, I touched on Trade Finance as a means of managing the cash flow of a business using debt. This final edition focuses on Short-Term Cash Flow Finance.

Short-term cash flow finance is typically provided by fintech financiers as a lump-sum cash injection. It is designed to provide an immediate solution to cash flow requirements and financiers are usually able to provide this type of funding within a few business days. This type of lending (in its current format) has only been around for less than a decade. Lenders in this space utilise algorithms based on your business’ main trading account’s cash inflows and outflows (among several other criterion) to determine how much the they are willing to lend you. Why this is important is because it is assessing the realtime ability of your business to take out a loan based on your cash flow predominantly. Whereas traditionally, mainstream lenders typically assess your ability to repay based on historical data (i.e. your end of year financials).

Pros

  1. Speed – Applications can be processed and decisioned within minutes rather than weeks and funds drawn down within a few business days (all depending on the complexity of the situation of course);
  2. Amortising from day one – This ensures no nasty lump-sum surprises at the end of the term, as the loan repayments are designed to pay out the loan in full by the end of the agreed term;
  3. No security required to access funds – If you do not have property to pledge as security you may still be able to access funding.

Cons

  1. Short-term – Loan terms are only usually up to 24 months however on average closer to 12 months;
  2. Amortising from day one – Whilst this has been mentioned above as a pro, it can also be a con as it does not allow for interest only for a period to accomodate irregular payments or lump-sum payments at a future date. Principal & Interest repayments are usually required daily or weekly;
  3. Higher costs – Generally, this type of finance attracts a higher interest rate (usually starting in the teens).

When faced with an urgent cash flow requirement, short-term cash flow finance can assist in financing you out of a cash flow hole. Its quick and seamless process enables businesses to secure the funding they require almost immediately. This is a process that could take weeks or months with mainstream business banking lenders, with no certainty of a favourable outcome.

However, it is important to keep the repayment structure in mind to ensure it fits in with your business’ cash flow. Otherwise, it could put you straight back in the hole.

As always, if you need any clarification pertaining to the above, please get in contact especially if you don’t think you have the right facilities in place to suit your business’ cash flow requirements.

Disclaimer: The information provided herein is for general information purposes only and does not constitute specific advice. It should not be relied upon for the purposes of entering into any legal or financial commitments. Specific advice should be obtained from a suitably qualified professional before adopting any investment/financial strategy.