Recruitment Insights

The problem with traditional cash flow finance solutions

January 13, 2023
The problem with traditional cash flow finance solutions

Australia faces a tough year financially, with a global recession predicted to hike interest rates and create debt that significantly impacts businesses and individuals. Among such uncertainty, you will need the means to ensure your business can survive.

If you lead a company that works on a contractual basis, you will not be a stranger to experiencing peaks and troughs in cash flow. While these are an inevitable reality of running a business, how you handle them can be the difference between growth and finding your company in a tighter spot down the road.

Traditional cash flow solutions for covering gaps

If you have experienced cash flow gaps, you might have tried some of the following methods to cover your expenses. While these stopgap solutions may solve the problem in the short term, they have downsides and limitations that can hinder business growth rather than support it.

Credit cards

Credit cards are perhaps the most common method for covering cash flow gaps, especially for smaller businesses. While there are short-term benefits, such as easy access to a pool of funds in the early period when finances are tight, what happens afterwards can be incredibly detrimental. You can cap out your limit quite quickly and it can be quite expensive if you don’t repay the balances on time. So, it is better to consider solutions that support long-term growth rather than relying on short term credit.

Bank overdrafts

You might overdraw your accounts when you need extra cash to cover business expenses or payroll while waiting on invoice payments from your clients. Taking your bank accounts into the negative can be a convenient solution at first, but you can only overdraw your account by so much, meaning that you cannot access any reasonable size limit without committing personal assets to support your bank’s risk appetite.

Without proper financial planning, an overdraft can quickly become a costly and dangerous avenue to pursue, as you may forgo lucrative opportunities if you max out your allowable funding limit. It will also see you take on an extra layer of risk if you choose to extend your limit by putting up personal assets as security. If you want to build up your business in the long run, relying on an overdraft should not be your sole solution when cash flow gets tight.

Personal savings

Digging into savings negates the interest rates and fees of the aforementioned solutions, but it creates negative long-term impacts for you and the business. You miss out on potential investment income, increase risk with your financial assets and lessen the funds available to handle emergencies in future. It puts the risk on the owner(s) rather than having the business support itself.

Not only does it take away from your funds or other financial goals, but it also indicates that you may not be accurately assessing cash flow needs and forecasting sales in a reliable manner. If you must frequently draw from personal savings, chances are there’s an underlying issue. Perhaps you are giving clients too much time to pay their bills, or your pay cycles might come more frequently than your invoice payments. Similarly as with external short term loan fixes you will be capped by the amount you have access to and you risk running short.

Invoice financing is your alternative to these traditional solutions

What is invoice financing?

Invoice financing allows quick access to the funds needed to cover cash flow gaps. Rather than taking out the above-mentioned traditional financing solutions, you can access the funds from unpaid invoices. Invoice financing allows you to free up working capital and gain more financial freedom to grow your business.

Similar solutions, like payroll funding, provide you with fast cash access without taking on additional debt. By offering immediate access to advances to cover 100% of wages, this innovative service stands out for its flexibility and convenience with tech enabled efficiencies to make the process seamless and easy. Providing quick access to funds when needed gives you the edge you need to succeed.

The process is straightforward and simplified even more so if you integrate your timesheet and billing technology with your payroll funding provider’s portal. This financing allows you to maintain cash flow without adding additional debt or seeking equity partners.

How is invoice finance different from traditional financing?

Risk is a fundamental part of business. You cannot be an entrepreneur and be averse to taking business risks. Starting a business requires investing in something you cannot guarantee will succeed, and growth requires cash.

The debt that we tend to avoid is the traditional bank loan. They typically require you to put up assets as security for the lender, and you need to provide credit history. This can be an issue, especially for startups who often cannot afford to put up their assets and lack the necessary credit history to be eligible. The traditional finance options can also be unsuitable as they are a stopgap solution to band aid cash flow problems rather than a tailored solution to their industries’ unique challenges.

Many of us have negative perceptions of debt. We understand taking out a loan as something we must only do when necessary and pay it off as soon as possible. It is considered high-risk and something you must avoid. You might think of invoice financing similarly, and it does resemble a loan at a first, surface-level glance. You need to look beyond the stigma of financial support brought about by traditional options. Instead, look towards modern solutions that offer flexibility and seed long-term future growth and profitability. Invoice finance is not debt, it just allows you to get access to your customers’ invoice payments quicker.

Grow your business with APositive’s invoice finance solution

To scale your business, you must overcome cash constraints to hire more people and expand your services. Invoice financing can be the boost that helps you scale your business so that you can focus on its growth. APositive has the experience to help you take on this challenge.

Our Payroll Funding solution provides you access to the money stuck in unpaid invoices. We also deliver a tech-integrated back-office solution with outsourced payroll options to remove the administrative burdens of managing it yourself.

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The APositive team is made up of recruitment industry experts with decades of experience helping businesses like yours. Get in touch with us today and see how we can make a positive difference.