In November last year we launched a new tool to enable business managers a way to assess the true cost of working capital funding, especially business overdraft funding.
That facility has been well received and is being accessed by a growing number of users.
Working capital funding for small and medium sized privately owned businesses is traditionally offered by a bank as a business overdraft and secured by real estate, often the owner's residence.
That usually allows the arrangement to be priced based on the residential mortgage rate, although facility fees and other margins almost always apply as well.
Our calculator is an easy way to assess the true cost of such arrangements. In most cases, the true costs are significantly more than the face home loan rate and surprises many users.
But for a growing business, the security (the real estate) limits the working capital funding level. Those security limits have nothing to do with the needs of the business.
To try and understand how a more flexible arrangement could be structured, I asked Terry Haydon of Cashflow Funding back to discuss the issue.
Haydon confirmed the problem is a widespread one for many small businesses.
The business need is to bridge the cash gap between buying its supplies and receiving payment for its goods or services. That can be anywhere from 30 to 90 days.
Most businesses have current assets of stock, debtors and work-in-progress and these can grow quickly when the business is expanding.
But traditional working capital funding gives no recognition to these very real business assets when it is in a growth phase.
It can be double-trouble. Banks also often require an all-encompassing general security agreement from the borrower in addition to the real estate security, and this effectively prevents the business accessing those working capital assets when they most need it.
Haydon described the benefits of using working capital assets as the primary basis of working capital funding.
Although 'notoriously difficult to secure' in the past, new techniques and facilities are now available, and when they are secured they allow the financing levels to grow as the business grows.
And although this can be done with no real-estate security limit, having real-estate as an additional element of security will reduce the effective cost of the overall facility, and extend the levels.
It turbocharges the funding potential for working capital.
Turning the focus around in this way makes the funding much more useable for a growing business.
Haydon also pointed out that the costs of this alternative approach can be very competitive with the traditional alternatives. In may cases significant savings are possible
Our calculator is a good place to start assessing the size of the business facility you need or may be qualified for, along with the related costs.
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