Against the backdrop of our declining property market, the banking royal commission and talk of the Reserve Bank further reducing the cash rate, early 2019 is shaping up to be more bear than bull when it comes to market sentiment.
Key economic indicators are suggesting subdued times ahead. Christmas spending was down on expectations with December retail sales surprisingly weak. And business confidence took its largest monthly fall since the global financial crisis at the end of 2018, plummeting 82% from a rating of +13 in November to +2 in December, according to NAB’s monthly business survey.
So where does this leave small business? Off the back of a quieter-than-expected Christmas period, many small business owners are facing into cash flow challenges in early 2019. Aware that the major banks have significantly tightened their lending criteria, they’re looking to alternative funding solutions as a way to finance growth. In fact, Xero’s State of Lending Report, released in September 2018, suggested that just 8% of small business owners will seek to fund their future growth via a business loan.
Indeed, many businesses who are currently in a comfortable cash flow position are scanning the market for alternative funding solutions that will give them fast and flexible access to cash if and when they need it. While you’re likely to incur application and ongoing management fees for many of these products, some operate on a pay-for-use basis which means that interest is only payable when the facility is used.
If you think you’re unlikely to need an alternative funding solution – but would like the peace of mind that you’ve got access to additional capital in a cash flow emergency – one of these popular options may be right for you.
1. Unsecured Business Loan
An unsecured business loan is a short-term facility that gives you access to funds that can be used for any business-related expenses. No security is required, however you may be asked to provide a personal guarantee.
Most unsecured business loans must be repaid within 12 months, which make them a less attractive option if you’re looking for an ongoing solution that allows you to boost your cash flow on an as-needs basis. Interest rates for unsecured business loans are also usually quite high.
2. Personal Loan
If the business is yours, you can apply for a personal loan and use these funds to finance your business purchases. A personal loan provides good flexibility with regards to what you can spend the money on, but also carries personal risk as you – not your business – are responsible for repayments. Your eligibility will depend on your personal credit rating.
Interest rates for personal loans are generally quite high. You’re required to repay the amount you’ve borrowed in instalments over the loan term, and most personal loans can be repaid early.
Also called debtor finance, invoice finance allows you to access funding using your accounts receivable ledger as collateral. Just send a copy of the invoice you’d like an advance against to your invoice finance provider to receive up to 80% of the value of that invoice within 24 hours. These funds can be used for any business-related expenses – from investing in new equipment or employees to paying operating costs or unexpected bills.
It’s simple to apply, and you can use your invoice finance facility as you need it, up to an approved limit. For this reason, it’s a great solution to cover a short-term cash shortage if you’ve had an unexpected slow period or are dealing with late payers.
4. Line of Credit
A business line of credit works in a similar way to a credit card – you can use it to pay for any business expenses at any time, up to an approved limit. You’ll only pay interest on the amount of money you use, giving you the flexibility to use your line of credit regularly, or just in case of cash flow emergencies. (Other fees are usually payable regardless of whether you use the facility).
Most line of credit products require regular payments, and the entire line of credit is often repayable on demand – so it may not be the most appropriate funding choice for small businesses who are looking for an ongoing safety net.
5. Hire Purchase
Hire purchase is a good option if you’re looking to buy plant, machinery or equipment for your business. The asset you finance will be owned by the lender until the end of your finance term – when you’ll have the option to keep it, sell it or replace it with a brand-new equivalent.
A hire purchase arrangement allows you to pay for an expensive asset over its lifetime, rather than upfront (though you’ll need to pay a deposit). It’s a less flexible funding solution than other choices as it can only be used to buy a physical asset – not for general operating costs.