Many businesses, such as those in labour hire, have a natural trade cycle where suppliers (in this case, payroll) need to be paid before the customers pay. This negative cash flow cycle requires some type of funding to facilitate normal operations and the funding needs increase with growth.
Failing having access or wanting to access your own cash reserves, often the first point of call is the traditional overdraft. In the current economic climate, it is difficult for SME businesses to access any reasonable size overdraft without a good level of property security. Even if this is available, the overdraft option does not suit early-stage businesses without the required trading history.
Cash flow funding in the form of Debtor Finance or Payroll Funding, is the finance solution most suited to many start-up businesses.
- Debtor Finance is the generic name for funding against the debtors of a business. Providers of this type of finance have generic finance products to cover all B2B industries.
- Payroll Funding provides funding against the invoices raised by recruitment businesses with the predominant focus to cover the payroll commitment.
This is a well-suited option for recruitment businesses as it uses the largest asset of the business – the invoices outstanding – to facilitate the funding line, and avoids the need to call on personal or external assets. In the case of multiple owners, it keeps the financing arrangements even and the access to funds is directly proportional to the sales of the business, and therefore the cash flow needs.
Cash flow funding is very popular in the U.K and U.S.; in the U.S it enhances your credit rating as businesses are considered more solvent with these facilities in place. In Australia, however, awareness is low and perceptions are varied. Australia’s first experience with cash flow funding many years ago has left some with negative perceptions that remain today.