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Small business growing pains

by Susan Edevane

2 min read

Growing your business is exciting. Suddenly everything starts to take off – you win new clients, sign major orders and start really moving up a gear. But rapid growth can actually be a challenge.

While it may be the best problem to have, a fast-growing business can face a major cash crisis. Whether it’s more staff required to cope with demand or extra materials needed from suppliers, you can quickly run out of working capital.

Even when you’ve fulfilled your orders, there’s likely to be a payment delay of 30 days or more, so how do you pay salaries and your own bills? Fortunately, there are several options available, even to new businesses.

Overdraft

Depending on the amount of funds you need, an overdraft may tide you over. Interest charges may even be tax deductible in some cases. Make sure you have an authorised overdraft because otherwise you can incur considerable fees.

Business credit card

Credit cards are a popular credit option for small businesses. The downside is that interest rates and penalty fees can escalate if you can’t make your repayments on time.

Bank loan

Business loans are a traditional way to supplement cash flow during a crisis, but they can be hard (and slow) for new businesses to secure. Most banks are wary of loaning to startups because they want to see a financial track record for your company. In some cases it may be possible to access inventory finance, where products you buy for sale are used as collateral for the loan.

Line of credit

Securing a line of credit from a bank can be a viable option. Banks are more willing to lend to a business if they can see a draft service contract or letter of intent. Once the client pays you, you can pay down your debt. This means you only have to pay interest to the bank for the amount of time you actually need the cash.

Debtor finance

This comes under a range of different names, such as “cash flow finance” or “invoice factoring”. Essentially it allows you to raise money on an invoice before the customer pays it. You can usually get up to 80 per cent of the value of the invoice within a couple of days, but it may depend on the creditworthiness of the customer. The financier, which may be a specialist company or a bank, usually charges a rate of up to 3.5 per cent of the invoice value to do this. The rate then increases if customers pay late.

As with anything, prevention is better than cure. So how can you avoid becoming a victim of your own success in the first place? Several accounting options can help soften the strain.

– Shorten payment terms, or offer customers an incentive (such as a discount) for paying early.

– Seek longer payments terms from your own suppliers.

– Streamline your product lines, which lowers costs and helps you benefit from economy of scale.

– Run a really tight ship. Don’t waste any of your startup capital and try to maintain what reserves you can.

Above all, stay friendly with lenders and ensure your accounts are in good order to maximise your chances of getting money quickly when you do need it.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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