It was once said that eight out of ten businesses went bust not because they were not profitable but because they ran out of cash and were unable to manage their cash flow adequately. Any new start business will probably go to their bank as a first port of call and try and arrange a bank overdraft. If you have a sympathetic bank manager and if he likes you allotyou might get a £10k facility. Anything over and above that they will want personal guarantees , register a debenture over the business and will need to take a charge over your personal property providing you have enough equity.
The next obvious step for additional working capital would be to apply for an invoice factoring facility which will release up to eighty five percent of your unpaid invoices. Now in our opinion the banks are not the best at providing factoring to new start businesses. You will be a very small fish in a very large sea and as such service and accessibility may indeed frustrate you somewhat. However because you have a small overdraft and a debenture registered you will be railroaded into using the banks in house factoring company because to use a third party funder you will need to repay the overdraft to get the debenture released. A debenture is a fixed and /or floating charge over the book debts of the business. Any cash flow facility either invoice factoring or overdraft will require that the lender has a debenture.
Ok the bank would seem the obvious choice however as soon as the business starts to grow you may find that your overall limit is restricted and you end up with less cash with the banks overdraft and factoring facility compared with a independent factoring facility who traditionally will fund your invoices to a higher level. In addition as your turnover starts to grow the problem increases further whereby it is difficult to get cash. You then start looking around for a more flexible funder and hopefully in the meantime cash flow isn’t affected beyond repair.
Tags: Factoring, invoice factoring
