Bridging The Finance Gap

Wednesday 8 October, 2008

by Matthew Nolan

It's ironic that businesses most susceptible to cash flow problems are often the successful ones in growth mode. But a cash flow problem should not spell the end of a burgeoning business. If approached with the right mentality - and the right tools - a growth spurt can position your business for its next phase of growth, without running out of working capital.

Even the most successful businesses can have problems managing their cashflow. This particularly holds true for those undergoing rapid expansion.

Whether a spurt of growth is the result of a sales drive, the launch of a new product, a contract won or successful marketing campaign, it generally ushers in additional expenses. No problem you say? If you're making more sales, then surely you'll be able to cover these increased costs ... True, but not always straight away.
Unless you've got cash tucked away in a bank account or assets that can be quickly borrowed against or liquefied to cover short-term expenses, you can easily find yourself in the middle of a cash flow crisis.

• Shouldering the risk
  
  Consider this: Only 5% of Australian small-to-medium enterprises (SMEs) are considered fast growing. That means around 95% are only growing modestly, if at all. Many have simply stalled, unable to access the right type and amount of capital to fund their business growth.
  
  The question needs to be asked: Why is this the case, when there are several options available to SMEs to finance their businesses?
  
  One reason is that many SME owners tend to be wary of putting their personal investments - typically a prerequisite for most mainstream bank financing - on the line in order to fund the expansion of their business. That's understandable. Entering self-employment can be risky. It's a big enough step leaving the safety of a salaried job behind without staking everything that you have acquired in life so far.
  
  Herein lies the pay-off however: Risk also offers reward: And for SMEs with a sound product or service, the pay-off can come in droves.
  
  So the question is, why feel threatened by raising finance against the equity in your home to boost the success of your business? If you don't believe your product or service will sell, you've got some serious soul-searching to do. You've also got some serious business planning to undertake! If you're not willing to take on the risk, perhaps you might be better positioned as an employee rather than an employer.
  
• Financing options
  
  The good news is that there are alternatives to putting private real estate on the line to fund business growth. Capital is now more readily available to businesses as well as private borrowers. And there are essentially two types of funding: equity and debt.
  
  Equity
  
  For many SMEs, and particularly those lacking skills in some core business disciplines, equity finance can offer a very positive injection both in terms of cash and knowledge. The trade-off in raising capital through the sale of business equity is that business owners will lose some control and subsequent share of profit. The upside is that you are not putting your own assets on the line to help fund your expansion.
  
  Debt
  
  The other mainstream option is debt finance. There are products that use guarantees or business assets as security to raise finance, rather than real estate. Key products in this camp can include factoring and inventory finance.

SMEs that achieve rapid growth deserve congratulations. It is what many strive for in business. If you're planning or entering a growth phase, keep a close eye on your cash flow and consider all your funding options well before a crisis is upon you. Just adopt the right mentality to financing expansion, matching it with the right product, and you'll be well positioned to grow and prosper.


Source:ceoonline.com