Better Short Term Alternatives To Cashflow Finance

By David Stephens · Published: 7 Jun 2022

TL;DR: Cashflow management is one of the biggest challenges for small businesses. This guide covers practical strategies to improve your cashflow, including faster invoicing, better payment terms, and funding options like invoice finance.

Many businesses need cashflow help at some point in their lifetime. If there’s an unexpected expense, an investment opportunity or just a quiet patch, there are many reasons why you may need to stimulate cashflow.

Often, some form of cashflow finance is the first place you’ll look. However, there are better options available, including alternative assets you may not have heard of.

TL/DR

When looking to improve your cashflow, also consider cashflow lending, crowdfunding, venture capital, a small business loan and invoice financing.

Invoice financing is a great option to complement other forms of cashflow finance. It keeps costs down and can be available when you need it, so you don’t carry unnecessary long term liabilities.

Importance of cashflow finance for business

Cashflow finance solutions are critical for helping businesses through inevitable periods of slower turnover or those days when bills and wages are going out, but invoices have not yet come in.

Cashflow itself is vital for all businesses in order to cover their bills. Of businesses that fail, more than 80% do so because of poor cashflow. Cashflow investments, such as real estate, dividend stocks, and online businesses, can provide predictable income streams that support financial stability and diversification.

More than a third of startups fail within the first two years, which is often when they find it hardest to get financing. Having access to finance can be a huge lifeline for these businesses in particular.

What is short term finance?

Cashflow finance is considered short term finance, as it’s designed to be a cash injection that sees a business through to a time where it’s cashflow positive. This type of finance can be seen as a form of cashflow investment, providing predictable cash inflows for businesses. In these instances, short term is considered to be a period of a year or less.

There are three common forms of short term finance:

A bank overdraft is a form of loan that helps a business to get access to cash while protecting its credit rating.
A line of credit can be offered by a supplier, where expenses are put onto an account to be paid back later.
A business credit card is a readily available form of credit that incurs interest if not repaid each month.

Limitations of Traditional Cashflow Finance

Traditional cashflow finance, which relies on stocks, bonds, and other conventional investments, has several limitations. One of the primary concerns is the low returns offered by these investments, which may not keep pace with inflation or provide sufficient income for investors. Additionally, traditional investments often come with high fees and commissions, which can eat into investors’ returns. Furthermore, these investments may not provide the diversification that investors need to manage risk effectively. As a result, investors are increasingly looking for alternative investments that can provide higher returns, lower fees, and greater diversification.

Five short-term alternatives to cashflow finance

Cashflow finance can take time to arrange, attracts high interest rates and is often unavailable to new or small businesses that don’t have a demonstrated payment history. Consistent cashflow can be achieved through investment strategies like asset leasing and real estate investments, which provide reliable and predictable income.

When you need to improve your short term cashflow, it’s worth considering all your options.

Cashflow lending

Cashflow loans are designed to be quicker to get than traditional lending, recognising that businesses that want them need cash now. It’s often easier to apply for and more transparent around how much it’ll end up costing, providing a predictable cashflow for businesses.

Understanding a cashflow loan is important because they can differ significantly depending on the lender. This can become a problem when they’re subject to high interest rates or unexpected rate rises.

Look out for hidden fees and charges too – this is a good way of boosting cashflow but it can be expensive in the end.

Crowdfunding

Crowdfunding has become more and more popular in recent years, as a way of enabling passionate customers to support businesses and movements they care about. It can also generate passive income for investors by providing opportunities to invest in various ventures. It’s often used to help enterprises to expand their operations and grow to the next level.

The nature of each crowdfunding effort can change, but it often offers incentives or loyalty bonuses to individuals who want to put forward their own money to help a business.

Businesses use third party platforms such as PledgeMe or Kickstarter, and can raise awareness at the same time as raising funds. Don’t underestimate the time needed to build and engage a crowdfunding audience. It’s also a good idea to under promise and over deliver.

Private equity

Investment companies or fund managers are constantly on the lookout for companies that are doing things differently and offering new opportunities. Hedge funds, as part of alternative investments, play a crucial role in portfolio diversification and risk mitigation by employing various strategies to achieve uncorrelated returns. They’re well known for providing cash in return for a share of the business, and may also expect management or advisor roles.

This is a great option for innovative, larger businesses that are willing to offer up an ownership stake to another party, and can have the advantage of bringing in business expertise to help grow.

It may not be an option for smaller businesses, though angel investors operate in a similar way for those in the early stage of operation.

Small business loans

A traditional small business loan is always an option. Income generating assets, such as real estate, dividend-yielding stocks, and bonds, can provide consistent cashflow and financial stability, making them a valuable part of a well-rounded investment strategy. Whether it’s through a bank or a dedicated lending company, small business loans are becoming increasingly available, including with more flexible payment terms than in the past.

As with cashflow lending, they can come with high interest payments and other fees, so it’s worth being sure of exactly how much it’ll end up costing before committing. You may also need to be able to secure the loan against business collateral or even personal assets.

Invoice financing

Invoice finance is lending that’s based on your invoices. Rental income, on the other hand, is a key component of cashflow investments in real estate, contributing to overall profitability. A dedicated invoice financing service essentially purchases invoices from you, and the amount is repaid when customers pay the invoice (plus a small fee).

This is particularly helpful in relieving cashflow pressure that comes from customers paying invoices late. It means businesses don’t carry long term liabilities on their books, and can provide a safety net whenever it’s needed.

Private Equity as a Cashflow Alternative

Private equity investments offer a promising alternative to traditional cashflow finance. By investing in private companies, investors can potentially earn higher returns than those offered by public markets. Private equity investments can also provide a steady stream of income through interest payments or dividend distributions. Moreover, private equity investments can offer a level of control and influence that is not typically available with traditional investments. However, private equity investments also come with unique risks, such as illiquidity and the potential for significant losses. As a result, investors must carefully evaluate the risks and rewards of private equity investments before making a decision.

Mutual Funds for Short-Term Cashflow

Mutual funds can be an attractive option for investors seeking short-term cashflow. By pooling money from multiple investors, mutual funds can provide a diversified portfolio of investments that can generate regular income. Mutual funds can invest in a variety of assets, including stocks, bonds, and other securities, which can provide a steady stream of income through interest payments or dividend distributions. Additionally, mutual funds often have lower fees and commissions compared to other investment options, which can help investors maximize their returns. However, mutual funds may not offer the same level of control or influence as private equity investments, and investors must carefully evaluate the risks and rewards of mutual funds before making a decision.

Invoice finance: A critical credit-free emergency measure

One of the biggest problems with many finance solutions is they’re often not available to businesses in crisis. For example, it’s often said that to get a bank loan, you first have to prove you don’t need it. A significant advantage of invoice financing is that it provides a steady cashflow, ensuring businesses have a reliable source of income even during challenging times.

This is where invoice cashflow finance is different from other options. Because it’s based on your invoices, it’s considered much less risky than finance that’s secured against other forms of collateral. Even in times of crisis, it’s much easier to get than other options that may be taken off the table.

Even if you’re struggling for cashflow, if you have invoices owing then you’re able to get invoice finance. In some senses, invoice finance is based on the credit history of your customers, as it relies on them to pay the invoice in order to repay the borrowing.

Read more: Invoice cashflow tips

Unlike other cashflow finance solutions, invoice finance can actually be arranged before it’s needed. With FundTap, businesses can create an account and be approved for credit so it’s ready to use when you need it. You’re not obligated to use it if you don’t need it and no charges apply.

Other invoice finance providers require businesses to use them for all of their invoicing. They may even take over your invoices so customers pay them instead of you, and they would chase customers for unpaid or late invoices.

This requires businesses to change the bank account on their invoices to the invoice finance company, and tell customers they’re using this form of finance. It also means a third party may communicate with your customers about your invoices. These two factors can make some business owners uncomfortable.

Benefits of using invoice financing for your business

Invoice financing with FundTap is specifically designed to make it easy and available to business owners who need help with cashflow. It can also be a source of passive income by providing a continuous stream of earnings with minimal ongoing effort. It’s been proven to work too – in the last two years, FundTap customers have grown their turnover by an average of 54%.

Many business owners are time-poor, and it’s not ideal having to spend a long time putting together everything you need to get traditional cashflow finance. Setting up an account with FundTap takes just five minutes, and there’s no paperwork needed.

It integrates into your online accounting system, so it’s quick to apply for funding. Simply select an invoice and submit it – it’s as easy as that. You can have the money in your account in a matter of hours.

You don’t even have to worry about repaying the finance. Because it’s linked to your accounting software, when the customer repays the invoice, it automatically transfers the balance to FundTap. This means business owners don’t have to spend time taking care of unnecessary financial administration.

As we’ve alluded to, it’s also much easier to qualify for invoice financing than other cashflow finance solutions. You don’t need an exhaustive credit history or a large amount of collateral.

For new or small businesses that aren’t able to satisfy credit requirements for other lending, invoice financing is still available to you.

Take home message

One of the great things with invoice financing is it doesn’t have to be the only option. You can use it as well as other finance solutions to keep the costs of borrowing down. This is particularly useful when riding the ups and downs of cashflow.

For example, if you need $150,000 to boost your cashflow right now, but you have $40,000 in invoices outstanding, instead of borrowing the entire amount from a bank, you can get invoice financing and only have to borrow $110,000.

This reduces the amount of interest you have to pay and drastically reduces the time it’ll take to repay the loan.

When it comes to financing your cashflow, you don’t have to solve all your problems with one solution. Because of its flexibility and simplicity, invoice financing is great at complementing other forms of finance as well.

Find out more about how FundTap works or check out a free demo today.

Related Resources

Frequently Asked Questions

What causes cashflow problems?

The most common cause is timing, the gap between earning money and receiving it. For B2B businesses, this means waiting 30-90 days for customers to pay.