Every aspect of business costs money, and the success of an enterprise of any size is uniquely dependent on its ability to access the capital it needs. Loans and other types of financing traditionally play an important role in this, supplying businesses with the capital they need to initially launch their operations, and to fund growth and expansion.
Due to changing lending practices in Australia, however, businesses have increasingly lost access to the financing resources they’ve come to depend on. More critically, the uses of financing, as well as the need for it, has evolved significantly over time. Today, many businesses rely on financing not just to invest in themselves and to support growth, but in order to maintain their everyday operations. Financing allows them to smooth over cash flow irregularities, and to keep operations running smoothly. This is critical in a more globalised economy, where long and complex supply chains often result in cost effective, but otherwise prohibitively long cash conversion cycles.
Fortunately, businesses do have other financing options. While falling real estate prices and risk averse banks do limit traditional financing options, alternative finance is stepping up to provide businesses with cash they need to continue to thrive.
Financing is not an optional part of doing business
In the 21st century, doing business without using financing isn’t viable in most situations. Besides initial investments and funding for growth, financing is used to manage a wide range of issues that ultimately make businesses more stable, more efficient, and more competitive. These include, among others:
● Managing supplier payments, including complex overseas relationships
● Compensating for temporary revenue shortfalls due to late payment
● Covering unexpected costs, such as repairs or hiring due to unexpected attrition
● Pursuing time-sensitive growth opportunities.
Without easily available financing, businesses aren’t as agile, and can’t respond effectively to budget shortfalls or short term opportunities. They lose the ability to quickly and easily adapt their current working capital to a given situation, which makes them less competitive compared to other businesses.
SMEs have been squeezed the hardest
Businesses of all kinds have experienced increased difficulty in accessing traditional financing. SMEs, however face a larger problem. Since many small businesses don’t qualify for traditional business loans, they have instead secured loans against the personal real estate of the owner. With home values coming down all over the country, this secondary option is becoming less viable. Without borrowing any additional money, their loan to value ratios have changed, leaving them unable to access additional funds, or even forcing them to begin repaying loans that they weren’t prepared to pay yet.
Alternative finance can help
While many businesses still rely on personal loans, or financing from their primary banking institution, alternative institutions offer a number of financing tools that are specifically designed to solve these problems.
The most accessible of these is invoice finance, which allows businesses to trade in an outstanding invoice for the majority of its value up front, effectively giving them an advance. The financier then collects on the invoice, before issuing the remaining funds, less their fee. Because this is a credit free form of financing, it’s often accessible to businesses in all kinds of situations, regardless of their prior credit history.
Supply chain finance
Supply chain finance is an ideal solution for businesses of all sizes, particularly those with complex supply chains. This allows businesses to pay their suppliers through a credit fund, instead of out of their own pocket. If a supplier is dealing with their own cash flow issue, they can request early payment in exchange for a discount. This way businesses can reduce supply costs, without actually impacting their working capital. The balance on the investor supplied credit fund is then paid off at a later date, and payments can even be deferred if desired to help shorten the cash conversion cycle.
Getting cash fast
Unlike traditional loan applications, which can take weeks or months to process, these tools can be used almost instantly. This allows businesses to quickly and confidently access funding when they need it, which allows them to compete more effectively. For example, a business that uses invoice financing can confidently accept a large new client, because it can reliably access its own future revenues in order to expand its operations to actually accommodate that client.
Businesses that want to remain competitive in the 21st century literally can’t afford to lose access to financing. By learning about, and taking advantage of, the alternative financing tools that are available, they can ensure that neither current lending trends nor real estate prices can keep them down.