Almost every small or growing business needs to borrow at one time or another. But if you’re facing a sudden cash flow crisis – bills to pay and no working capital to pay them with – then simply getting a loan isn’t enough. You’ll need money almost immediately – and need a decision within 24 hours. So if you find yourself in this situation, how can you get the cash you need to keep your business from going under?
Talk to alternative lenders
Review the pros and cons of small business loans and then talk to alternative lenders.
There’s no doubt that banks have their uses, and a strong relationship with a bank is a huge asset to any small business. But banks are not known for reaching fast decisions on loans, particularly since they tightened their lending criteria following the financial crash of 2008. Chances are your bank will want to see a ream of paperwork – your articles of incorporation, balance sheet, three years’ profit and loss statements, a cash flow projection, a business plan, maybe even directors’ CVs and three years’ tax returns – and it could take you several days just to assemble this paperwork. It could then be days to weeks before the computer says yes or no, by which time your business will find itself in considerable trouble.
In contrast, alternative lenders have quite different acceptance criteria, and are likely to be more interested in where your business is going than where it’s been. There’ll be a lot less paperwork to prepare, a streamlined decision-making process and far less emphasis placed on your credit rating.
Seek asset-based finance
As the name suggests, asset-based finance involves borrowing against the value of a business asset, such as your premises (assuming you own them), plant or equipment. Because the loan is secured, the lender’s risk is reduced, meaning that you’re more likely to be accepted and your interest rate is likely to be lower.
Of course, a word of caution is in order: if you default on your repayments, your lender will be able to seize the asset to repay the debt. This stands in stark contrast to an unsecured loan, whereby your creditor would need a court order to touch any of your assets.
Consider invoice factoring and discounting
These innovative solutions are ideal if you’re not merely facing a one-off cash flow lacuna but have ongoing problems with late-paying customers. Use invoice factoring and discounting and you can borrow against the value of your invoices (typically up to around 85%) – so it’s like getting paid immediately. No longer will tardy major customers be able to disrupt your cash flow, and you won’t find yourself frantically chasing money when your monthly bills – or, worse, quarterly VAT bill – hit the doormat.
As the name “invoice discounting” suggests, the finance company will take a small portion of the invoice value to pay for its services, forwarding you the balance when your customers pay. With factoring, the finance company will assign experienced credit control professionals to secure early payment, which is perfect if you don’t have a dedicated accounts receivable team and don’t wish to divert your people from revenue-generating activities in order to chase debts.
In contrast, some companies have highly developed accounts teams and prefer not to have their customers dealing with third parties over debts, and hence opt for invoice discounting. Whichever option suits you best, factoring and invoice discounting can tame a troublesome cash flow forever.
Look at a business line of credit
A business line of credit acts like an overdraft: your lender will agree a credit limit and an interest rate and you will be able to borrow and repay at will. The flexibility that this offers is unrivalled, and you can use the facility again and again: drawing down when cash flow is tight and repaying when business is booming. The drawbacks? This is a relatively risky form of borrowing for lenders, so your interest rate is likely to be fairly high and you will probably need a strong credit rating to be accepted.
Pursue a merchant cash advance
Another notoriously expensive but extremely useful method of borrowing is a merchant cash advance, whereby you borrow a fixed sum and repay it via an agreed percentage of your daily credit card sales. The advantage over a traditional loan, where you make fixed monthly repayments, is obvious: your repayments correlate directly to your turnover, meaning you will never find yourself facing an unaffordable payment during a quiet trading period. However, you will pay significantly for this privilege.
Secure an emergency loan
Of course, if things are truly bad – if you’ve received final demands for tax, rent or bills – a decision within 24 hours may not be enough. In certain circumstances, you may require the actual money within a day. With some alternative lenders, this is entirely achievable. Their accelerated decision-making process can give you a decision on the same day and the cash in your account on the next – and that could mean the difference between continuing to trade and going into liquidation.
So what will you need to succeed?
As already noted, alternative lenders have quite different application procedures from banks and will generally require far less paperwork. However, less paperwork doesn’t mean no paperwork, and they will need to be convinced that you will be a responsible borrower before they will give you rapid cash.
In particular, you should be clear about why you need a loan so urgently, and should be able to demonstrate that your company is profitable and growing – in other words, that you are facing a temporary cash flow crisis or growing pains rather than teetering on the brink of bankruptcy. For this reason, an inspiring business plan and a realistic cash flow forecast can be very useful assets.
If you are seeking a secured loan, you should consider carefully what you can offer by way of collateral (and should think long and hard about how your business would cope if it were to lose the asset). If unsecured lending is more appropriate for your needs, then you should be realistic about your chances of acceptance and should talk to a number of lenders to improve the odds.
Finally, don’t despair. If your business is facing bills it cannot pay, you might feel as though there’s nowhere to turn and no chance of staying afloat. But the fast-growing alternative lending sector was built on helping companies just like yours – filling the cracks left by banks, with their more archaic structures and much slower decision-making.
Be realistic about your prospects, look at all the options above and talk to a number of alternative lenders, and you could very easily find yourself just 24 hours from a solution to your cash flow woes.