Many business owners leverage personal real estate equity to come up with funds that they can inject into their business. Because traditional business loans take a long time to approve, and are often not accessible to small or relatively new businesses without much of a business credit profile, personal equity is an easier to way to get funds to drive growth, deal with cash flow issues, or launch the business in the first place.
While using personal collateral to fund a business is risky, and not ideal because of that, it was one of just a few ways to get funding for entrepreneurs. In the past year, however, real estate prices have gone into decline, and personal credit is also becoming much more difficult to access. In order to protect their businesses, and their personal finances, entrepreneurs need access to other financing options. Moreover, they need financing that doesn’t put them at greater personal financial risk, and that isn’t buried under red tape that takes weeks or months to get through.
Small businesses are finding themselves out of pocket
With real estate prices falling dramatically in Australia’s major cities, many businesses are finding that their main funding resource has dried up. As their loan to value ratio (LVR) has increased, borrowers are increasingly finding that they simply don’t have more equity to leverage. This not only keeps those businesses from growing, it also makes it more difficult for them to deal with everyday cash flow issues, such as late-paying clients.
Because real estate prices have dropped fairly rapidly, business owners often aren’t even aware of the severity of the problem until their bank informs them that they can’t leverage any further. Some may even need to begin paying down their principle just to maintain their LVR. Considering this, it’s no surprise that business owners are increasingly anxious about their business’ finances. In order to keep their businesses operating normally and growing at a healthy pace, entrepreneurs need other forms of funding that don’t force them to rely on their private property as collateral. Fortunately, such funding options do exist in the form of a number of alternative finance tools, some of which are entirely debt free.
Supply Chain Finance as a lending alternative
Supply chain finance is a financing tool that allows businesses to pay their suppliers through a credit fund, rather then directly out of their own pocket. This can be underwritten without the need for real estate, and generally doesn’t rely on a business owners’ personal assets. In the case of a cash flow interruption, the business can simply use the credit fund to pay suppliers, and pay it off when revenues come in.
Alternatively, businesses can use supply chain finances to invest in growth. By paying suppliers out of the credit fund, they can free up existing working capital for other purposes. Payments on the fund’s balance can then be deferred by several months, after the business has generated additional income to manage it.
Invoice Financing is ideal for cash flow management
Businesses frequently need a fast financial boost to make payroll, manage a project that has gone over budget, deal with newly-discovered superannuation underpayments or ATO payments, or to pay off supplier invoices. When it comes to getting additional funds on very short notice, nothing works better than invoice finance.
Unlike debt-based finance, invoice finance effectively allows businesses to give themselves an advance on revenues that they have already earned. To finance an invoice, an outstanding invoice is traded to a financial institution in exchange for most of the outstanding amount up front. The financial institution then goes on to collect the payment itself, and issues the remaining amount, less their fee, to the business at that time. This means that even businesses that are fully leveraged can quickly and easily get access to additional funds on short notice, regardless whether they have any other working capital on hand at the time.
Negotiating better terms
Besides simply helping businesses come up with funds, these tools also make it possible for businesses to negotiate better payment terms with their suppliers. For example, many suppliers would be happy to offer a discount for an immediate cash on delivery payment instead of a 30 or 60 day payment term. This helps to make their own revenue stream more reliable, and allows them to meet their own payment obligations more easily.
Supply chain finance and invoice financing, for their part, are only a few of the financing tools available to SMEs that are facing difficulties as a result of Australia’s falling real estate prices. To help manage the situation, it’s a good idea to work with a financial representative from your alternative finance institution to determine what specific solutions would work best for you, to ensure that your business can continue to thrive, regardless what the housing market might do.