The truth about cashflow lending

I know I’m being Captain Obvious when I say that we’re not in a normal credit environment at the moment. Major lenders are saying it’s all business as usual but behind the scenes it most certainly is not. There’s restricted industries and clearly concerns about serviceability and frankly that’s probably a good thing. But even in the current environment market, business owners have more credit options from more different providers than ever before. 

The fin-tech, unsecured lender space is highly competitive and the more successful lenders in this space are excellent marketers. They market well to brokers, to business owners direct and especially to their existing clientele. 

It’s not uncommon for these kinds of lenders to contact their existing clients after 3-6 months of on time payments of their unsecured loan and offer them further credit. The marketing is so good and the speed to settlement so appealing that perhaps many business owners take this kind of loan product when their needs would be far better suited to another product.

So if you’re looking to get some fast capital into your business bank account when should you be looking to these kinds of lenders?

If you need capital as a short term investment and you’re confident you will get a return that’s significant on that capital, these unsecured loans are a great product. 

If you have a cyclical or seasonal nature to your business and you need some capital to manage a short term dip in cashflow until your highly profitable peak period returns, they’re a good option.

But, interest rates on these products are comparatively high and if you’re using these lenders like a revolving line of credit it’s an expensive way to go about it. 

Furthermore it’s likely there are other products that don’t require security and are more suitable for a lot of business purposes (at considerably cheaper rates).

What are other options that don’t require security?

Trade Finance

Trade Finance supports businesses making material purchases. This facility is an unsecured line of credit that pays suppliers direct and is a great solution for any business with a clearly defined supply line for their products and services they get a return on. This is especially beneficial for those in construction related industries, import / export business, manufacturing and wholesalers. It can even be used to import machinery and other assets from overseas and rates are a fraction of those you’d expect to pay on an unsecured loan. 

Progress Claims Finance

Progress Claims Finance is a line of credit that is purpose built for those in commercial construction. Like the name suggests, it’s a floating line of credit based on your progress claims - the greater amount of work in your pipeline, the higher the limit. This gives you access to capital and is great support allowing you to keep winning more business and allows you to bring your future payments forward to support you cashflow needs.

Debtor Finance / Factoring

Debtor finance is a specialised lending space that’s becoming more and more competitive. A debtor finance facility is a line of credit secured by your Accounts Receivable ledger. In simple terms, whatever the value of your invoices that you have sent out to your customers determines the amount of credit you’re able to access. Normally 85 - 90% of the invoice value is available to you as credit as soon as you have sent out the invoice. This means that it’s a great support to those business supplying the food industry, supermarkets, import / export and or any B2B environment billing on terms. Lenders in this space often assist different kinds of businesses or industries well and others not so well so it’s important to know each lender’s niche to ensure you’re with the right lender for you. 

And the truth is that it’s a combination of these facilities, usually at different times mixed with traditional mortgage facilities could be the right fit too. 

The main risk for businesses is not to get addicted to the fast turnaround times and constant lure of easy cash that some unsecured lenders continuously offer the customers. If your debt facility seems only to be going up and never going down, you might be better off looking at other options.