Sometimes you can’t money in quick enough to cover your goings such as Corporation Tax, VAT, PAYE or even to pay suppliers. This mismatch, which can be caused by timing delays in receipt of payment, can be disastrous for a growing business.

To fill this funding gap there are a range of cashflow solutions available to you.

Overdraft Facilities

An overdraft is a formal agreement with your bank which allows you to overdraw your account up to a specified limit. An overdraft facility enables you to access short-term funding to fill a temporary cash shortfall.

An overdraft can be paid off at any time and interest is only payable on the amount outstanding each day. An overdraft facility is more flexible than a traditional business loan.

Whilst an overdraft can be agreed for one month they are typically in place for 12 months and renewable annually.

Short Term Loans

Despite their flexibility overdraft facilities can take sometime to set up and so possibly causing you further cashflow problems. Short term loans have been developed by alternative lenders as a quicker and more efficient way of providing a solution to cashflow problems.

Short term loans are ideal to cover Corporation Tax, VAT, PAYE or NI arrears. They can also be used to supplement your working capital requirement during slow cashflow periods.

Short term loans can be granted very quickly but decisions are based on the quality of your credit file. The speed of decision and access to funds does come at a cost in terms of high interest rates and fees but these can be offset against the speed of decision and swift access to the funds.

Short term loans are for periods from one month upwards with flexible repayment terms.

Merchant Cash Advance

If you take credit or debit cards then a Merchant Cash Advance is an ideal way to raise cash quickly for urgent needs.

If you have been taking card payments for some time and can demonstrate a good track record then you can obtain an advance against future card receipts.

Once the lender agrees the maximum they can lend against your monthly receipts your repayment is calculated as a percentage of each credit or debit card transaction. It could be 10% or 20% for example depending on your business and risk.

The repayments are flexible in that there is no agreed end repayment term. The lender is repaid by taking the agreed percentage of each credit or debit card receipt until the advance is cleared.

The advantage is that the amount you repay matches your cashflow in that during slower periods your repayment are less because your takings are less. Compare this to a traditional loan where you have to pay the same amount each month regardless of what your sales have been that month.

Because the last payment date is flexible there is no traditional interest cost or an APR. Instead, a fixed fee is agreed at the outset and added to the amount to be repaid.

Invoice Discounting and Factoring

Invoice Discounting and factoring is a way of using a third party to immediately releasing cash once you issue new invoices to customers instead of waiting 30, 60 or 90 days for payment. By utilising an Invoice Discounting or factoring facility it provides you with the working capital necessary to fund ongoing growth.

Typically there is no limit to the amount you can borrow because the level of finance is directly linked to your level of sales. This means that the amount of funding available to you increases as your business grows.

Under the facility you can access up to 80% (in the case of some providers, 90%) of the value of the invoices with the remainder (less fees and interest) paid upon settlement. Funds can be released within 24 hours of you raising the invoice.

The difference between Invoice Discounting and Factoring is:

Invoice Discounting is granted on a confidential basis which means that you retain control over collection of the debts and credit control

Factoring is a facility whereby total responsibility for the debtor collection process lies with the factoring company; your customers will be aware that you factor your outstanding invoices

When reviewing what can be funded the discounter will look at a complete sales ledger or selected invoices. Some discounters may not favour particular sectors due to specific industry issues. Also the discounter may decline to lend against some invoices, where for example it believes the customer has a poor credit risk history, small value invoices, invoices raised to overseas companies, or invoices issued with long credit terms.

An Invoice Discounting or Factoring facility can be approved for sole traders, partnerships, LLPs, and Limited Companies. As well as reviewing your past and current financial performance the discounter will examine the quality of your sales ledger, past payment history and your credit control processes.

The Typical requirements, terms and conditions would be:

• You need good credit control systems in place
• A good track of payment from your clients
• The discounter will charge a monthly service fee in the range of 0.5% to 3% of the turnover. Interest is also payable calculated on the amount borrowed against the sales invoices submitted. The interest rate will be a fixed percentage over the discounter’s Base Rate
• For security a floating charge over the trade debtors

What Do I Do Next?

To find out more simply send us an email via the Contact Us box at the foot of this page or call us on 08456 809 728.