Running a business isn’t always plain sailing and there may be times when you need an injection of funds, fast. There could be a number of reasons for this, such as broken equipment that needs replacing, late payment of invoices, or coping with seasonal peaks and troughs.
There are many funding options available to businesses and some are designed specifically to cover scenarios like those described above.
The funding you could apply for will depend largely on what you need the emergency finance for, as there are many tailored products out there that are more suited to particular situations. Let’s have a look at some of the more common reasons that businesses might need emergency finance and the possible funding options on offer.
Finance for late payment
Waiting incredibly long periods of time for customers to settle their invoices is a common problem experienced by businesses. In some cases, they could even be waiting up to 90 days to get paid for work they have long since completed. This can make running a business almost impossible where cashflow is concerned, especially for those firms which rely on a handful of large customers.
If you’re waiting months to get paid, how do you pay your suppliers for the goods you need to fulfil the next order?
Invoice finance is a great way to release cash and improve cashflow by borrowing money against your unpaid invoices. It involves a lender looking at your sales ledger, so as soon as you send an invoice, the lender advances you the majority of the cash immediately. They will pay the rest, minus their service charge, once the invoice has been paid by your customer.
For businesses trading overseas, the pay cycle is even longer, which is when trade finance comes in handy. When cashflow is tight, trade finance allows you to pay your supplier for a confirmed order, so the goods can be shipped without leaving you out of pocket for a long time.
Hire purchase for broken equipment
If your business relies on an asset, for example if you’re a manufacturer and key piece of machinery breaks, you’ll want to get it replaced as soon as possible. There are various asset finance options that can help if you can’t afford to buy it outright.
Hire purchase, for example, enables you to spread the cost of an item over time without a large up-front cost. Repayments are normally fixed on a monthly basis for easy cashflow management and you will own the asset at the end of the term.
There are also options for leasing the equipment, without having to buy it at the end, if that would suit your business better. This can also be a good option for any equipment that you don’t need for the long term, or if your future is uncertain. Maintenance is usually taken on by the lessor, and when the contract is up you can give back the equipment, or start a new one.
Merchant cash advances for sales businesses
There’s another type of borrowing which is great for retail businesses, and particularly those which use card terminals to process payments from customers. Merchant cash advances are a type of lending based upon your future card revenue, and effectively involve selling your future sales to the lender at a discount.
Unlike a standard loan, which has interest constantly running, the total cost of finance is agreed upfront and the amount you repay is proportionate to how much money you make — you’ll always be working towards paying off the fixed amount agreed at the beginning.
This can be a good way of releasing cash for broken equipment or plugging a cashflow gap in a retail business.
Short term loans for seasonal peaks
Some businesses are very seasonal, especially at times like Christmas, Easter or school holidays. This can require a significant amount of upfront investment as you prepare for the peak by buying extra stock, employing additional staff and maybe even taking on additional office or warehouse space.
A short-term loan could be a good way of injecting extra cash into your business to tide you over until the seasonal sales start to materialise. There are many business loans available now, from a variety of lenders, including loans specifically for small businesses with terms as little as three months.
Revolving credit facilities for seasonal troughs
On the other hand, some businesses will see a huge drop at times like Christmas, when business may almost grind to a stop. Throw in staff holidays and late payment from other customers and a seasonal trough can quickly become a serious situation.
Revolving credit facilities can be a good way of making it through those tough times. Rather than having a fixed loan agreement, these products are on a rolling agreement. You’ll have a set credit limit, but as soon as you have repaid some of what you owe, you can borrow again – as long as it’s within the overall limit. It’s like an automatically renewing loan that you can dip into as and when you need it when times are tight.
There are many different forms of emergency finance available when you need funding fast. Of course, some may be more suitable than others and accessing them can depend on the criteria of the lender, but the bottom line is there’s likely to be something suitable. One thing you should bear in mind is that fast and flexible finance usually comes at a price, so interest rates tend to be higher. In this article we’ve outlined just a few of the main funding options, but there are many others, and Funding Options can help if you need more help narrowing down the search.
Conrad Ford is Chief Executive of Funding Options, recently described by the Telegraph as “the matchmaking website for small businesses and lenders”. Funding Options has been selected by HM Treasury to help businesses find finance when they’re unsuccessful with the major banks, as part of the Bank Referral Scheme that launched in November 2016. @FundingOptions