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With the threat of recession looming in the wings it is a time of reflect on your own personal risk associated with your business. Whilst there will be opportunities presented form many SME’s For most companies, recession means only one thing – times will get tougher. Tough times means the very survival of the business you have spent years building up could potentially be under threat. Just ask yourself one question ? If my business were to cease to trade what would I lose? The answer for most small business owners would be “everything”. Let’s look at how the typical small business is funded.
Unlike their corporate counterparts, where finance facilities are secured against the assets of the business itself, the majority small businesses are funded by means of a bank overdraft secured by the family home – the four walled box. But now in potentially recessionary times the terms of the underlying banking contract you signed (and let’s be honest probably without reading the small print) take on board a more sinister meaning.
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About the Author: Tim Lea is the co-author of the book "A Guide To Factoring and Invoice Discounting: The New Bankers."
He has spent 20 years within the Cash Flow Finance industry, as both a lender and a broker and is the Managing Partner of Cash Stream Financial, an independent commercial finance broker specilaising in Factoring, Invoice Discounting and Inventory Finance. |
If the economy takes a recessionary turn as many commentators are predicting, banks will tighten their credit policies further – as always happens during recessions. Equally, if they have any doubts about your business’s ability to repay the overdraft debt they have the power to call that loan in and force you to sell your home. This is because most overdrafts are repayable on demand. Now whilst this is painting an extreme picture and clearly this will not happen in every situation – we have to look at ideas at protecting your own personal assets as much as possible.
The four walled box is the cornerstone of your life – personal and business. Let’s think outside it for the moment. If your business operates in the business to business space, you will have outstanding invoices. You are waiting for them to be paid. These can be used as security for a funding facility – factoring.
Take your current outstanding invoices – to make it easy lets say there is $800k outstanding. You can generate a lump sum into your cash flow of up to 90% of that value, i.e. up to $720k. So let’s say your overdraft facility is $350k, which is secured against the family home, by considering factoring you can re-pay the bank overdraft (as the bank manager would probably want you to do), release the security over your home and have an additional $370k of funding in your business – to help you either weather the upcoming storm or develop new opportunities that might be presented. Equally on an ongoing basis as soon as you raise new invoices you get up to 90% cash against the invoices (the remainder paid to you when the customer pays), so in theory you could secure settlement discounts from suppliers to help offset the additional costs of factoring.
Whilst the reality is that there are additional costs associated with factoring, the benefits can be very strong – and ask yourself one question - what is the cost of peace of mind ?
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About the author: Tim Lea has specialised in factoring and invoice discounting for the past 20 years and is a published author on the subject of factoring and invoice discounting. He is a partner of Cash Stream Financial (www.cashstream.com.au), who are specialists in raising factoring and inventory finance. You have full permission to reprint this article provided this resource box is kept unchanged
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