Since their peak in 2017, property prices in Australia’s major cities have taken a distinct downward turn. While the drop has been minimal in some cities, such as a 0.7 per cent drop for Melbourne, and 0.4 per cent in Adelaide, others have been hit quite hard. Sydney home prices have dropped by 3.9 per cent, and Perth has suffered a 10.8 per cent decline.
Lower home prices might be welcome news for homebuyers, but they could spell trouble for many of Australia’s small business owners. For many entrepreneurs, decreasing home values can make credit more difficult to access, which can be a serious issue when dealing with a cash flow interruption. Those who find themselves in a financial pinch will need to find other ways to get the financing they need. Fortunately, alternative financing is perfectly suited to meeting financing needs in situations just like this.
Lower property values can lead to higher interest rates
Falling property values are typically correlated to rising interest rates. A slower real estate market can make it more difficult for lenders to raise funds, driving up the cost of borrowing. Unlike their larger counterparts, small businesses often partly rely on the personal assets of the owner. This means that entrepreneurs may then find themselves spending more to service the costs on existing business loans that they’ve taken out on their residential properties.
On top of this, the Australian Prudential Regulation Authority (APRA) is demanding tighter lending standards following the recent Royal Commission. Facing these higher standards, and increased stress on the borrowing business, it’s likely that many small businesses will suddenly find their usual financing options drying up.
Business owners need other financing options
Cash flow interruptions are a fact of life for businesses of all sizes. To manage these efficiently, business owners need to be able to get access to flexible financing at a moment’s notice. Fortunately, many alternative financing options exist that aren’t tied to the interest rates, and that remain completely viable for any business regardless what state the real estate market may be in.
Invoice financing is a straightforward way to give your business an advance on revenue that it has already earned. Instead of taking out a loan, you simply exchange an outstanding invoice for most of its value up front. Your financial institution will then collect payment from the client when it comes due, and then pay out the remaining payment, less a predetermined fee. Since the funds are issued based on an invoice for work that’s already been completed and delivered, the risk is quite low for the financial institution. As a result of how this kind of financing works, your financial institution doesn’t necessarily need to take your business’ credit profile into account to finance your invoices.
Supply chain finance
Another great way to make your working capital stretch is to use supply chain finance. This is a tool that allows businesses to pay suppliers out of a credit fund, rather than their own pocket. The balance on that fund can then be paid off at a later date. This does work slightly more like a traditional loan, however financial institutions like Fifo Capital who offer this tool are much more likely to continue working with small business clients who are facing difficulties with securing financing from their primary lender.
Building a strong relationship with your financial institution
Unlike traditional banks, alternative finance institutions like Fifo Capital take a full 360 degree view of your business instead of simply going by your credit score. Furthermore, you’ll get a dedicated representative that works with you throughout your relationship. Over time, they develop a very thorough understanding of what your business is about, how you operate, and what you need to succeed. This isn’t just meant as a benefit to your business. Rather, as a long term financing partner, they have a stake in facilitating your long term success as a way of retaining your business.
Not only does this mean that your financial institution is more likely to continue working with you when you’re in a tight spot, it also means that they can advise you on highly specific financing solutions that might better suit your business’ particular situation. By taking the time to develop this kind of relationship with your financial institution, you can help make your business more secure in the face of rising interest rates, and increasingly limited traditional loan options.