Uneven cash flow can challenge the most profitable small business. There are various options for financing cash flow to help you manage the lean times and achieve your business goals. We’ll run through some of the pros and cons to help you find the best one for you.

Unsecured business loans

A loan for which no asset has been used as security.

Pros

You don’t need to provide collateral such as property or equipment. Instead, the lender will look closely at your credit history, credit score and how you plan to repay the money.

Cons

Lenders are taking a significant risk because they have nothing to fall back on if you default so these loans are generally more expensive and relatively small.

Invoice financing

If you’re owed money but need cash before you’re paid, invoice financing could be the solution.

Pros

Invoice financing lets you borrow against money you’re owed. In effect, the lender buys your invoice from you, deducting a percentage of the invoiced amount as a fee. It’s one of the fastest, easiest and most flexible options for business financing.

Cons

Again, invoice financing requires the lender to take a risk – in this case that your customer won’t pay. As a result, lenders may limit their financing to invoices issued to large companies with an excellent credit rating. If you work with smaller companies this may not be an option for you.

Revolving credit

Corporate credit cards, business lines of credit and overdrafts are all forms of revolving credit. They allow you to keep on borrowing without further applications as long you make your minimum payments on time.

Pros

Revolving credit provides flexible cashflow funding for small business. You can borrow up to your credit limit at any time and only pay interest on the outstanding amount.

Corporate credit cards are useful for smaller, everyday business purchases.

Business lines of credit and overdrafts both tend to have higher credit limits. They may also be cheaper than credit cards, particularly when the loan is secured.

Cons

Revolving credit makes financial sense if you only use it when you need to and clear the balance as quickly as possible. If you don’t, you could end up paying more in interest than you would with a more structured loan. Your bank can also call in an overdraft at any time.

Financing vehicles and equipment

Ideally your business will have enough cash in reserve to cover at least three months’ expenses. If paying cash for company vehicles or equipment would reduce that reserve you’re risking your longer-term cash flow. In this case, vehicle and equipment leasing could be a better option as it leaves your safety net intact so you may not need to apply for other business financing options to get you through a rough patch. Various types of lease are available from dealerships and vendors as well as banks, including vehicle and equipment leasing. Different options work better for different industries so it’s worth doing your research.

A cash safety net

Using a transaction and savings account wisely is a great way to make sure you keep some spare cash around in case things change suddenly or your business faces an emergency. 

Professional advice

Cash flow challenges and their solutions vary widely according to the type, size and stage of a business and whether it’s located in a major city, a regional centre or a rural town. A professional adviser can help you make the most cost-effective and appropriate choice.

Terms and Conditions

The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial and taxation advice before acting on any information in this article.