To continue our series of blogs on commonly asked questions, the team at Pinnacle Business Finance suggested we write a post on cashflow finance. Our team includes 2 invoice finance experts with many years of industry experience. They often troubleshoot cases where small businesses are on to their second or third business loan, with no idea where the money has gone.
The answer is simple, it’s because they have used the wrong tool for the job. Extra payments, bumper interest, fixed funding, and little protection are all the root causes. The article aims to give a broad understanding of why invoice finance can support cashflow over a series of commercial loans.
As an expert commercial finance broker, we make sure we understand the businesses we visit and speak to. A common response to the requirement for funding from a small business is cash flow. Unlike many commercial finance brokers, we don’t stop there, we talk it through. One such case led us to understand a business that was using business loans to buy stock. It meant long after the order was fulfilled, they were left with an additional daily payment that was crippling the business. When a new order came along, they had to take further borrowing. The cashflow problem therefore was getting worse each time.
The previous commercial finance broker had simply got them a business loan. They didn’t understand the cash flow cycle of the business. We suggested an invoice finance facility that would allow them cash when they needed, with no cost when they didn’t. It released more cash as they raised more invoices, allowing them to get the stock, but it didn’t leave ongoing payments. Like any safety net, it was there when they needed it!
Sadly, the story doesn’t end for this small business. The commercial finance broker hadn’t explained the fees. After we sat down with this client, they were paying a staggering 31% on the cost of borrowing over the year. Ultimately it cost the business financially and hadn’t solved the cash flow issue. The selective invoice finance facility will only cost the small business around half of the interest they were paying. It will also release the cash they need when they need it, with no ongoing commitments.
Having funding that grows with you is key and most importantly doesn’t leave you with big liabilities if things go quiet. One business didn’t understand the key of cashflow and was left feeling the heat. They had borrowed around £30k in business loans and relied on topping them up before the festive season. Unfortunately, one of their customers went under owing them £50k, around 20% of their annual turnover.
The cashflow was hit! If they had taken out bad debt protection with an invoice finance facility, they could have been protected. Instead, the newly topped up loan was now having to be repaid and the business had just lost 20% of their turnover. The small business had to be restructured, and the whole pain could have been avoided. You can make a house out of paper, but it is no use when it rains!
It’s evident that getting the right solution is key, especially if that issue is cashflow. Invoice Finance can provide more than just funding, it can provide protection as well. Using business loans are often expensive if they are used in the wrong way. Ensuring you have funding that is secured will protect you in most scenarios. Pinnacle Business Finance can take the time to guide you in the right direction.
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