The cash flow difficulties can occur in any business, of any size, at any time. This could be because of the time lag involved in collecting cash from your customers or any delay in delivering your goods and services. Whatever it be, the cash flow finance can be a great choice for your business.
Cash flow finance is basically a short-term business lending, designed to cover your business’s immediate cash needs, allowing you to fund the ongoing business operations and cover large cash outflows. The typical cash flow financing options include trade credits, bank overdrafts, and short-term bank loans.
However, just like everything else, there are pros and cons associated with this as well. Let’s break down the pros and cons of the cash flow finance to help you decide which of these lending types best suit your business:
The Pros of Cash Flow Finance
Improve Cash Flow
Short term finances can help in supporting the growth of your business by giving you a security of income i.e. improving the cash management and giving you more control over the business direction and growth.
Maintain business continuity
A healthy supply chain relies on the prompt payment of the key suppliers. Consequently, lack of cash can seriously impact the business continuity. Short term finances also make sure that the cash is on hand for timely settlement of the accounts payable.
The Various Cash Flow Financing Options
Let’s go through the pros and cons of the very famous short-term cash flow financing options:
Pros: Trade finance is referred to as one of the best sources of cash flow financing options and is well celebrated for its flexibility, security, cost-effectiveness, and freedom from restrictive terms. And, since it is directly linked to the trade flows, it scales the trade finance automatically with your business activity.
Cons: This lending type has traditionally been restricted to large organizations with very strong credit ratings.
Pros: This credit type is usually available from suppliers to your business. So, if you need credit instantly, trade credit is a good option. It is also directly linked to your purchasing requirements, so you only access the credit when you need it.
Cons: The security of lending is low and the interest rates are usually really high.
Short-Term Bank Loan
Pros: Short-term bank loans offer a much higher security of lending than a bank overdraft. This high security makes short-term loans a good option to support business growth.
Cons: Though the security of a short-term bank loan is high, the freedom is low, as loans normally have many restrictive terms attached to them. And, the more urgent the need for a loan, the higher is the rate of interest charged.
Pros: A bank overdraft is possibly one of the most easily arranged forms of short-term finance, and competition amongst banks for this business frequently results in low borrowing costs.
Cons: The security of lending with a bank overdraft is very low. Banks have the power to withdraw an overdraft facility with little to no warning, which could leave your business exposed to dangerous cash shortages. There can also be additional fees applicable to your facilities, such as arrangement or administration fees. In some cases, security is also requested for this type of lending, possibly in the form of a director’s guarantee.
The above-mentioned options for Cash Flow Finance open up the benefits of a comprehensive range of trade finance products, both to the corporates as well as the SMEs in the business sectors. Known to support the most established businesses, these options help businesses with banking and non-banking funders, providing the security and flexibility of lending.
If you require cash flow finance you can discuss it with experts at GCC Business Finance Team.