Working capital finance: 7 options for managing business cash flow

Working capital is the money a business uses to meet everyday operating requirements.

A business can be profitable on paper but experience cash-flow pressure when wages, tax, suppliers and rent must be paid before customers settle their invoices.

Working capital finance can help manage a temporary timing mismatch. It should not be used without a credible plan to address continuing operating losses.

1. Business overdraft

An overdraft allows the business account to operate up to an approved negative limit.

It can suit recurring, short-term cash-flow fluctuations. Interest is generally charged on the amount used, with other account or limit fees potentially applying.

The lender may review the facility periodically and can require security.

2. Business line of credit

A line of credit provides access to approved funds that can generally be drawn, repaid and reused.

It can provide flexibility for stock, seasonal expenses or unexpected costs.

Compare the interest rate, establishment fees, line fees, security and repayment requirements.

3. Invoice finance

Invoice finance provides funding against eligible unpaid business invoices.

It may assist businesses that sell to other businesses on payment terms. The available amount is linked to qualifying receivables rather than solely to property security.

Costs, customer-notification arrangements, recourse provisions and invoice eligibility can differ substantially.

4. Trade finance

Trade finance can help fund the purchase of goods from local or overseas suppliers.

It may be useful where a business must pay suppliers before goods are delivered or sold. Consider foreign-exchange exposure, shipping delays, customs costs and the timing of customer payments.

5. Short-term business loan

A short-term loan provides a defined amount repaid over an agreed period.

It may suit a known requirement with a clear repayment source, such as purchasing seasonal stock or completing a contracted project.

Short terms can result in high periodic repayments. Compare the total dollar cost rather than relying only on a headline rate.

6. Equipment or asset finance

Where the funding need relates to a vehicle, machinery or equipment, asset finance may be more appropriate than using a general working-capital facility.

Matching the finance term to the useful life of the asset can help preserve cash reserves. Balloon or residual payments may reduce regular repayments but leave a larger amount due at the end.

7. Supplier and debtor management

Not every cash-flow gap requires a new loan.

Possible operational measures include:

• negotiating supplier terms
• requesting deposits
• invoicing earlier
• following up overdue accounts
• reducing excess stock
• adjusting pricing
• reviewing subscriptions and overheads
• setting aside GST, PAYG and superannuation obligations.

Operational improvements can be used alongside finance.

What lenders assess

Lenders may consider:

• business trading history
• bank-account conduct
• cash-flow forecasts
• revenue and profitability
• aged debtors and creditors
• tax debts
• existing facilities
• directors’ credit histories
• security
• the reason for the cash-flow gap.

Warning signs

Working capital debt may be inappropriate where:

• the business is consistently loss-making
• tax and superannuation debts are continually increasing
• new borrowing is being used to repay earlier borrowing
• there is no identifiable repayment source
• management information is unreliable
• the underlying problem has not been diagnosed.

In these circumstances, seek advice from an accountant, restructuring adviser or insolvency practitioner before taking on further debt.

Choose a facility that matches the cash cycle

Call to action: A finweb business finance broker can help compare working-capital facilities and prepare a funding request based on your business cash-flow cycle.

*General information only. Finance increases business liabilities and may require personal guarantees or property security. Obtain independent professional advice.*