One of the biggest obstacles that prevents SMEs from growing and flourishing is cash flow shortages.
According to a recent survey by Intuit Quickbooks, “61% of small businesses regularly struggle with cash flow.” Furthermore, “Among those small business owners who have had cash flow issues, nearly a third (32%) have been unable to either pay vendors, pay loans, or pay themselves or employees.”
The implications are far-reaching and can adversely impact several critical aspects of operations. One way SMEs can bridge the cash flow gap is to leverage key assets to obtain capital — some of which business owners may not even realize are options.
Here are three hidden assets you can potentially tap into.
Often when SMEs sell to large wholesalers or retailers, they aren’t paid right away and must wait awhile until they receive payment. It could be 30, 60, 90 or even 120 days. All the while invoices remain unpaid, and business owners are unable to pump money back into their company. In turn, this leaves them with their hands tied and can put a strain on growth initiatives.
Debtor finance (also known as invoice finance or invoice factoring) is a process that involves using your outstanding accounts receivables to secure a line of credit. Here’s how it works.
First, you send the same invoice you send to a client to a lender. At that point, you wait for approval, which typically happens within 24 hours. Once approved, the lender will pay you up to 95% of the value of the invoice upfront, less any fees. From there, you’ll receive a cash advancement, and you’ll receive the rest of the money once your client pays the invoice in full.
Rather than waiting the full duration to get paid by a client, debtor finance allows you to accelerate the process and gain access the money much quicker. That way you can maximize your cash flow, keep reinvesting into your business and save yourself a lot of hassle. Due to the convenience it offers, debtor finance is becoming an increasingly popular financing option, with 9% of SMEs using it in 2018.
A Real Life Example of Leveraging Invoices
One company that has successfully used invoice financing to boost cash flow and unlock massive growth is Ribs and Roast, a leading wholesale supplier of meat products based in Sydney. Back in 2013, they experienced a surge in customer demand that was causing them immense difficulty. The 300 to 400 square meter facility they were located in at the time was insufficient for meeting their production needs, and they were forced to turn down business because of their limited capacity.
However, after utilising invoice financing, they were able to generate the money they needed to upgrade to a much larger 1,500 square meter facility. As a result, they were able to keep up with the stages of peak growth of 50% to 60% month on month.
This allowed them to keep their existing customers happy, build valuable new relationships and expand their business, all while having peace of mind that they had access to the necessary cash flow needed to make it all work.
The Benefits of Debtor Finance
As we previously mentioned, approval typically takes place within a day after uploading an invoice, making it much quicker than most other types of financing. If you need a cash flow injection in a hurry, this is a great method to use.
Also considering it is secured against against your accounts receivable, there’s generally no need for real estate security, so you don’t have to put up something valuable like your family home.
Finally, it offers a lot of flexibility so you can grow and adapt to increasing revenues like our example Ribs and Roast did. Debtor finance is extremely scalable, and a lender can act as a reliable partner who helps you seamlessly move through the various stages of business growth with ease.
Another option is property secured lending, which allows you to access additional funding against your plant or property. This is where you use your existing assets to secure lending, which can be a smart move if you currently own a manufacturing plant or commercial property. If you’re already using an invoice finance facility, this lets you obtain flexible working capital by using a significant plant or property as collateral.
Here’s an example.
Say you’re already using invoice financing to generate working capital and increase your cash flow. This would enable you to obtain a line of credit that’s secured by outstanding invoices. But if you were looking to increase your amount of funding and accelerate business growth even more, you could also use secured business finance by leveraging the factory you own.
This would be considered a significant piece of collateral, and many lenders would have a strong interest in giving you more money upfront to facilitate growth.
3. Business Equipment
Hard assets include:
Light commercial vehicles (passenger cars, utes and light trucks)
Heavy commercial vehicles (tractor vehicles for towing and semi-trailers)
Manufacturing equipment (metalworking machinery, cranes and hoists)
Agricultural machinery (tractors, harvesters and backhoes)
Soft assets include:
Audio visual equipment
IT hardware and software
Point of sale (POS) systems
Just like with using property, if you were already using an invoice finance facility, you could access even more working capital by using equipment as collateral. That being said, certain assets and items of equipment will be considered much more strongly as security than others.
Scenarios for Leveraging Property and Equipment
There are three main scenarios where asset finance would make sense. One is when you’re looking to raise additional finance for growth. Maybe you’re experiencing a major spike in consumer demand but are hindered by limited cash flow or the size of your current factory. Leveraging your property and equipment can provide you with the cash flow injection you need to spark growth.
Another is for a buyout. If you need to finance the buyout of a partner, it’s not always easy to fund it on your own. Coming up with the money needed upfront can be a daunting task even for the healthiest of businesses. But the cash flow you generate with this form of financing can help you quickly raise the capital needed to make the buyout a reality.
Third, it’s perfect for the sale of a business or merger/acquisition. If you need a large sum of money to purchase another business, leveraging your property or equipment is a viable solution that can get you what you need.
The Benefits of Asset Finance
For starters, asset finance gives you flexible repayment options including interest-only periods. This eliminates a lot of the stress and headaches that often comes along with traditional bank loans where repayments are extremely rigid with little leeway.
Asset finance also comes with flexibility in funding. For instance equipment financing with ScotPac allows you to fund new and aged products, imported equipment as a combination with their trade finance solutions, and can be funded after purchase or used for capital raising.
They also tend to be easier to obtain than most other types of loans and lines of credit. Banks are known for being highly selective about who they choose to give money to these days. According to Scottish Pacific’s March 2019 SME Growth Index, 20% of business owners said it was harder to obtain funding in 2018. And with the fear of an impending Australian “credit crunch” looming, lenders are expected to tighten even further, causing 34% of SMEs to believe that it will become harder in upcoming years.
Besides that, asset finance can help you gain a competitive advantage, creating an avenue to generate additional working capital. If you’re facing close industry competition, this can definitely give you an edge.
Capitalising on Your Hidden Assets
Having an effective means of obtaining cash flow is vital for SMEs. And in many cases, the assets needed for doing so are right under your nose.
Using one or more of the hidden assets mentioned here can help you access the capital you need to grow and take your business to the next level.