Did you know that 51% of businesses fail due to inadequate cash flow or high cash use according to the financial regulator? (ASIC)
Cash flow is not only the king but the way the kingdom operates from Day-to-day. Funding your small business is crucial, especially in times of uncertainty. If your small business is timid about getting the right kind of funding, here are five ways to secure small business funding in 2021.
1. Invoice financing
Instead of waiting 30, 60, or 90 days for the cash to come through, invoice financing gives small businesses access to up to 85% of the value of unpaid invoices upfront. This gives small businesses peace of mind and regularity of cash flow to help them manage their day-to-day expenses. The upside is that you get cash immediately, which helps cover short-term inventory, payroll, operating expenses, etc. However, becoming reliant on invoice financing means getting less cash overall, as fees and other expenses (known as the "factoring fee") for fronting the money are taken out of the reserve amount. Depending on how speedy your creditors are, this can take a significant chunk out of what you're entitled to.
2. Unsecured business loans
The easiest and quickest way to attract funding for your small business is through an unsecured loan. An unsecured business loan requires no collateral and can be approved relatively quicker by a bank or lender. "An unsecured business loan is simple to set up and you could be using the cash to expand or cover costs within a day or two," says business finance expert and Savvy Managing Director Bill Tsouvalas. "Unsecured business loans have become a saving grace for so many businesses, even in the early stages. Getting cash flowing through your business is crucial, especially amid market uncertainty over 2020 and 2021. Fortunately for businesses, they can take advantage of record-low interest rates, too.” Depending on your growth profile and appetite for risk, your business can take on many unsecured business loans at the same time. “Remember to be responsible and only use short-term liabilities for short-term assets and long-term liabilities for long-term assets,” Tsouvalas says. “Failing to realise this business reality could make your business one of the 51%mentioned by ASIC.”
3. Equity finance
Equity finance is a broad term for gaining finance from external sources in exchange for a stake in the company. This may come from your own money or from other people or entities such as venture capital, angel investors, or friends and family. The obvious advantage is there is no debt or repayments involved. Unlike unsecured business loans(or secured business loans for that matter) their stake in the company is permanent unless they are diluted through issuing more shares or are bought out by other stakeholders. Depending on your business structure, they may also have the right to make certain decisions in the business.
4. P2P Lending
Separate from banks and other business lenders is a relatively new phenomenon called Peer-to-Peer lending. P2P lending connects businesses with investors who wish to gain a return on their money through lending to businesses. "The benefit of Peer-to-Peer lending is that interest rates may be lower than traditional loans and ask fewer questions,” Tsouvalas says. “However, this is a leap of faith on the part of the investor; if they are not interested in your business or don’t think your model has legs, it will prove difficult to gain P2P funding this way."
5. Grants and Tax Incentives
Your business may get government funding through grants or tax incentives. For example, if your business is a start-up and leading Australia’s technological future, your business may be eligible for a Research and Development grant. Your financial controller can include expenses when they lodge your tax return, and you will get a 43.5% refund on R&D-related expenses (38.5% for $20m+ turnover businesses). 22.6% of small businesses took advantage of this grant, according to a Startup Muster survey. For a full list, visit the Australian Government’s Grants and Programs page, here.
“When buying equipment and assets, also be mindful of the size and time-frame you intend to use the asset or equipment. A business loan may be useful for owning assets but if you need to update your equipment often, leasing may be a better option. Your business can also take advantage of instant asset write-offs, tax breaks, and credits such as getting your GST back and interest paid. Talk to a broker or your accountant to find out how."