Cashflow Finance in Australia: Rates & Options

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Cashflow finance options in Australia

Cashflow finance is a way of funding your businesses day-to-day operations that’s backed by your expected cash flow rather than by assets. If you get a cash flow loan, you will be financing your current operations based on the money you (and your lender) believe you will receive in the future.

But cashflow finance is not a generic, one-size-fits-all product. In fact, there are five key finance types that can be used by business looking for funds to boost cashflow:

Business credit card
An unsecured business loan
Business line of credit
Invoice finance
Business cash advance

When deciding which option will be best for your business, it’s important to understand how they work and are commonly used. Let’s look at each in detail.

Did you know? Accessing finance to boost cashflow is the most common reason small businesses come to Lend for help (28.9% of all finance requests).

1. Business line of credit

A line of credit gives a business access to ongoing credit whenever it’s needed. You’ll have a credit limit and instant access to those funds as the are required. You can draw down from the credit line repeatedly without need to reapply with the lender.

Your credit line may be:

Fixed – which means you can draw the funds in one or more tranches and then repay your loan by an agreed date.

Revolving – which means you can draw the funds, repay them and redraw them as often as you like within the term of the facility.

You’ll only pay interest on the amount you borrow, rather than the full value of the facility, although you will probably need to pay a fee to set up the facility (and possibly ongoing administration fees) based on the full value of the facility limit.

A line of credit usually charges a lower interest rate versus a business credit card (albeit without the interest-free days credit cards usually offer) but rates tend to be higher versus a fixed-term loan.

Is a line of credit right for your business?

A business line of credit can be a straightforward way to access funds. Once set up, you can generally access funds more or less instantly at any time. If cashflow is an ongoing issue for your business but you have strong overall revenue and profitability, a line of credit can make a lot of sense.

If you do qualify and you opt for a revolving line of credit you’ll need strict financial discipline. It’s all too easy to get dependent on having extra cash on hand. But remember, your lender could withdraw your credit line at any time. It’s important that you only use it to cover shortfalls in your working capital, rather than for longer-term purchases.

2. Unsecured business loan

You can use an unsecured business loan for any purpose, including as a way of boosting general cashflow.

With an unsecured loan you’ll borrow a fixed amount and then pay it back in fixed monthly, fortnightly weekly or daily instalments until it’s repaid in full.

Your interest will either be calculated with an annual percentage rate (APR) or factor rate, which is a multiple of the amount you borrow (e.g. 1.15).

As long as you’ve been in business for six months or more, there’s a good chance you’ll qualify for an unsecured business loan. Even if you have a poor credit rating, there are plenty of lenders who may be willing to offer you a loan to shore up your working capital.

If you have poor credit, the interest rate on the finance you pay can be high, and you may have to provide a personal guarantee on the loan, which could put your home or other assets at risk.

Is an unsecured business loan right for your business?

If you’re after cash in a hurry, you may be able to get an unsecured business loan in less than 48 hours. Unsecured business loans are very popular with business owners, because they’re straightforward and easy to access.

3. Business credit card

Many small businesses in Australia have business credit cards, even if they have no other form of debt.

A business credit card is a flexible form of short-term finance which is ideal for financing ong shortfalls in cash flow.

It’s also a simple and convenient way to cover your general business expenses. It can also be very economical as long as you pay off your full balance each month.

If you find you can’t pay off your balance, that valuable interest-free period can quickly turn into compounding interest at very high rates.

Is a business credit card right for your business?

Having a credit card makes it super easy to buy from retail or online suppliers, so you’ll have no trouble keeping your office stocked, booking travel etc. There are lots of different types of business credit cards (rewards cards, frequent flyer, low rate etc.) so chances are there will be an option to suit.

Just watch out for the very high interest rates (20% p.a. or higher) on some credit cards, if you will need to repay the funds over a longer period of time.

4. Merchant cash advance

If yours is a retail or hospitality business and you accept payment for sales via credit card or EFTPOS card, you may be able to access a merchant cash advance. This can be an expensive form of finance, but offers one major advantage:

Your repayments will be directly matched to your income.

With a merchant cash advance, you’ll receive a lump sum loan and then repay it, usually in daily instalments as a percentage of your credit card or EFTPOS sales.

You’ll start making repayments immediately, and may have anywhere between 90 days and 18 months to pay off the full amount plus interest. As with a small business loan, your interest may be calculated as a factor rate rather than an annual interest rate.

Is a merchant cash advance right for your business?

If you don’t yet have an established trading record and credit history, but you can prove you have a steady cash inflow, a merchant cash advance might be a good option for you.

It won’t be a low-cost option though – you could pay up to $1.50 for every dollar that you borrow – so be sure to consider other options before opting for this type of cashflow finance.

5. Invoice financing

Invoice financing, also known as factoring, is considered by some to be the ultimate form of cash flow financing.

Why? Because it lets you accelerate the cash you’ll receive from your customers. Unlike all the other forms of cash flow finance on this list, factoring doesn’t involve borrowing. Instead, you’ll sell your invoices (or accounts receivable) to a third party.

You’ll get a cash advance (usually of up to 90% of the invoice value) and the factoring company will then collect payment of the invoice from your customer. At that point they’ll deduct their fee and pay you the balance.

Is invoice finance right for your business?

Invoice finance has a lot of advantages. Firstly, lenders will look at the creditworthiness of your customers, rather than your own financial history, so you may be able to access it even if you can’t get any other form of cash flow loan.

Using invoice finance means you can offer credit terms to customers – which can make your business more competitive – without having to worry about the long gap between paying your suppliers and getting payment for your services.

There are some pretty serious pitfalls to consider, though. For one thing, if you opt for a ‘recourse’ factoring arrangement, you could end up having to buy back the invoice from the lender if your customer fails to pay.

On top of this, once you sell an invoice, the factoring company will deal directly with your customer. That means you’ll have no control over the way they communicate, which could damage your customer relationships and your precious reputation.

Pro tip: Cash flow issues are the main reason businesses in Australia fail – so cash flow financing might just be the solution you need to keep your business solvent until your paper profits turn into cash in your bank.

Common uses for cash flow financing

To prepare for seasonal peaks and troughs

If your business is seasonal, you might need an injection of cash upfront in order to prepare for a seasonal peak (so you can buy in extra stock or take on extra staff in time to train them up). Or you may need help to make it through your slower times.

To buy new equipment or inventory

Sometimes, demand for your products or services may increase. This is great, of course – but to meet the extra demand you may need to buy new equipment or additional stock. Cash flow financing can be a handy way to fund it, because you can use the money you’ll earn from the increased sales to pay back the loan.

To pursue an exciting opportunity

The business world can move very fast, and you may be offered an opportunity with a very short window in which to commit. To take advantage you need money now. Cash flow finance could give you the funding you need, if you’re confident that the opportunity will eventually pay for itself.

To hire more people

Maybe your company is expanding faster than you anticipated, or you need people to fill roles that will lead to more and more growth. Great news! But of course you’ll need to pay these people. If you don’t yet have the money to cover their wages, cash flow financing could help you cover the costs until you start generating those extra profits.

To expand an online business into a bricks-and-mortar store (– or vice versa)

If taking your business multi-channel is your goal, you may need to rent and fit out a new store or office, or set up a first-class website and e-commerce suite. Cash flow finance can help you to move into your physical or online channel, so you can start to generate those extra sales.

To expand in other ways

You might also need funds to grow in other ways – like moving to a second location or adding a new product or service to your line. Cash flow finance could give you the resources you need to fund that growth.

Pro tip: Using cash flow financing can be risky. You are relying on EXPECTED future income – but what happens if you don’t generate the extra profits you are relying on?

That’s why it’s important to get advice from your accountant or independent financial advisor before you apply for any form of cash flow finance.

Now you know what cash flow finance is and how you could use it, it’s time to explore what makes a good cashflow finance option, and a bad one.

How to compare different forms of cash flow financing

When choosing which type of cash flow financing is right for your business, ask yourself the following questions:

How much money do I need?
What will I use the money for?
How quickly do I need the funds?
When do I think I can repay the borrowed amount?
Will I need a one-off sum or ongoing credit I can access in smaller amounts?
How much will each option cost me?

Answering the question about cost can be trickier than it might seem, because the interest is calculated in different ways on different types of loan (APR vs factor rate, for example).

Even when you’re comparing loans of the same type, you can’t just look at the advertised rate, because there will almost certainly be other fees and charges involved. You’ll need to take all those into account when you calculate the comparison rate.

This is one of the reasons why getting the help of a business finance broker can save you a lot of time and potentially save you a packet too.

Of course, before you commit to borrowing for cashflow, you should consider the overall as they apply to your specific situation.

Pros and cons of cash flow financing

Pros

Accessible to those with poor credit

If you don’t yet have good credit, you can still qualify for many forms of cash flow financing, especially invoice financing. So you may be able to access the funds you need to keep your cash flow healthy or grow your business, even if you don’t qualify for a traditional business loan.

No collateral required

Cash flow finance is generally unsecured, so you won’t need to offer assets as collateral – a major benefit if your business doesn’t yet own any assets.

Revenue-based repayments available

Some cash flow finance options let you pay back your loan as a percentage of your revenue, rather than through fixed regular payments. This is great if your business is highly seasonal, as your payments will be directly tied to your cash flow.

Helps fund growth opportunities

You won’t have to miss out on great opportunities just because you don’t have spare cash. Cash flow financing can allow you to place orders on new inventory, or to scale up and take on larger contracts or projects.

Provides a safety net in slow periods

You’ll have the backup you need to keep your business afloat if things get slow. This couldn’t be more important, since poor cash flow is the number one reason businesses fail. Even large successful businesses that are profitable on paper can be brought down by lack of cash.

Simple application process

Most forms of cash flow financing are quick and easy to access. In most cases you’ll just have to fill in a simple online form without having to produce piles of complicated paperwork to support your application.

Fast funding turnaround

You can get money quickly. Some lenders will give you an on-the-spot response to your application, and you could have the funds in your account within days or even hours.

Can help build business credit

As long as you keep up with the repayments on your cash flow financing it will help you to start building or improving your business credit rating, which may open the door to future financing options.

Cons

High interest rates

The interest rates on cash flow loans can be pretty high. Trying to cover your loan repayments could make your cashflow situation even more challenging.

Growth may not yield quick returns

Exciting growth opportunities may not generate as much profit as you expect – or may take longer than expected to show a return. In the meantime, you’ll still have to finance your repayments, which could put a strain on your working capital.

Early repayment may not be allowed

Even if you no longer need your cash flow finance, you may find you can’t repay your loan early to save on interest, because of the way that your payments are structured.

Default risk impacts credit

If money gets tight and you default on a loan payment you could do serious damage to your credit rating and business reputation.

Personal guarantee may be required

For some forms of cash flow finance, you may have to provide a personal guarantee. If your business is forced to default, you’ll be personally responsible for repaying the loan.

Risk of over-reliance

Some business owners see cash flow finance as a dangerous trap. They may have a point. It’s all too easy to become dependent on cash flow finance and very tempting to treat on-call cash as your own funds. You may decide it’s better to wait and fund your business growth out of profits, rather than rely on borrowing and throw those precious profits away on interest repayment

If you’re still not sure, get in touch with a Lend finance specialist who can help you understand your options in more detail.

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