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In business, having steady cashflow is critical to keep operations running smoothly. However, there may be times when your business experiences a short-term dip in revenue or unexpected expenses, leading to uneven cashflow. This can make it difficult for businesses to pay bills, make payroll, and invest in growth opportunities. Fortunately, there are several cashflow finance options available to help businesses bridge the gap between cash inflows and outflows. In this blog post, we will explore the three most popular cashflow finance options: line of credit, debtor/invoice finance, and business term loan.
Line of Credit/ Overdraft:
A line of credit or overdraft is a flexible finance option that businesses can use to cover short-term expenses. It allows you to draw funds as needed, up to a pre-approved limit. Unlike a term loan, you only pay interest on the portion of funds that you’ve drawn and for the duration that you’ve used them. This type of finance is ideal for businesses that need to cover fluctuations in their cashflow. One drawback, however, is that interest rates may be higher, and there may be maintenance fees or annual renewal fees.
Debtor/Invoice Finance:
For businesses that have outstanding invoices from customers that have not been paid, debtor/invoice finance can be a valuable option. This involves a third-party lender purchasing your outstanding invoices and then providing you with a percentage of the invoice total upfront. Once the invoice is paid, the lender deducts their fees and returns the remaining balance to you. This finance option provides businesses with a reliable source of short-term cashflow. However, it comes with fees that can add up quickly, including drawdown fees ranging from 1-3% and interest charges and often can only be utilised by businesses servicing other businesses and not consumer, so B2B clients only.
Business Term Loan:
A business term loan is a standard finance option in which a lender provides a fixed lump sum of funds to a business, and the business repays the loan with interest over an agreed-upon period. This type of finance is useful for businesses that have a specific purpose in mind, such as purchasing new equipment or expanding their facilities. The interest rate on a term loan is often lower than that of a line of credit, and repayment terms can be more extended. However, unlike a line of credit, a term loan accrues interest from the moment it’s drawn until it’s paid off.
When it comes to selecting a cashflow finance option for your business, it's crucial to consider your business's specific needs and the total cost of funds over the term. While a line of credit or overdraft may offer more flexibility, it comes with higher interest rates and fees. Debtor/invoice finance may provide reliable short-term cashflow, but with added fees that can accumulate quickly. A business term loan can offer a more extended repayment period with lower interest rates but accrues interest from day one. Whatever your business's needs may be, it's essential to choose a finance option that fits those needs and short-term goals. By understanding these key differences, you'll be well on your way to securing the funds you need to keep your business running smoothly. If you have further questions on what might be the best way forward for you and your business, reach out to us at SFE Loans and together we can find the best option.
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