Cash flow finance options, compared honestly

Most cash flow problems are timing problems, not profit problems. The work is finished, the invoice went out on the first, wages ran last Thursday, and the money lands in sixty days. A profitable business can run out of cash for a full quarter without ever making a loss.

That distinction decides which product fits. A timing gap is funded against the thing creating it: receivables, stock, work in progress, or equity in an asset you already own. A trading gap, where the business is not covering its costs, is not a finance problem, and no facility fixes it. A lender will see which one you have in your bank statements faster than you expect, so it pays to know first.

• Debtors stretching from 30 days to 60 or 75 while suppliers hold their terms
• A BAS or PAYG instalment falling due in the same fortnight as a payroll run
• Stock or materials paid for months before the job can be invoiced
• A large contract won that needs funding before the first progress claim is certified
• Seasonal trade where four good months have to carry the other eight

Price broadly tracks two things: what the money is secured against, and how quickly it has to be there. The cheapest facilities are secured by real property and take the longest to arrange. The fastest are unsecured or short-dated, and you pay for that speed. Nothing on this list is inherently good or bad; each one is right for a particular shape of problem.

Fastest to arrange

Unsecured

Cheapest over time

Property-secured

Grows as sales grow

Invoice finance

Funded by gear you own

Equipment refinance

Best for a monthly swing

Overdraft

Built for imported stock

Trade finance

An overdraft is a revolving limit attached to your trading account. You draw it when you need it, interest applies only to the drawn balance, and a line fee usually applies to the full limit whether you use it or not. It is the natural product for a business whose balance swings above and below zero every month.

It is also the hardest of these to obtain quickly. Banks review overdrafts annually, take a general security agreement over company assets, and in most cases want real property support as well. They will want current financials, and they will look closely at your tax position. A business carrying an unpaid integrated client account balance often finds the overdraft conversation stops there, which is exactly why the tax debt usually has to be dealt with first rather than last.

• Two years of financial statements and tax returns, lodged and signed
• Interim management accounts if the last year end is more than six months old
• Six to twelve months of business bank statements
• An ATO integrated client account statement showing lodgement and payment history
• Aged receivables and aged payables reports
• Details of every existing facility, guarantee and PPSR registration

Three options fund against assets already on your balance sheet. They tend to price better than unsecured money because the lender can see what stands behind the facility.

Invoice finance

A financier advances a set share of an eligible invoice when you raise it, and pays the balance less fees when the debtor settles. The limit grows as the ledger grows, which is why it suits a business winning work faster than it can fund the wages behind that work. It only exists for business-to-business trading on terms.

Equipment refinance and sale and leaseback

If you own trucks, plant or machinery outright, a lender can advance against them and take security over the asset. The cash comes out of gear that is already earning, and the family home stays out of it. Age and type of asset drive both the advance and the term, and there are tax consequences to a sale and leaseback that your accountant should price before you commit.

Trade finance

A trade line pays your supplier at order or shipment and gives you a set period before repayment falls due, so the stock has time to sell. It is built for importers, wholesalers and distributors, and it is generally cheaper than funding the same stock on a card or an unsecured loan.

An ATO balance does not sit still. The general interest charge compounds daily, and it is not deductible the way interest on a business loan generally is when the borrowing is genuinely for business purposes. That single difference is why a tax balance behaves worse than almost any commercial facility of the same size.

A payment plan is a form of finance in everything but name. It defers the balance, it does not discount it, and the interest charge keeps accruing underneath. Plans can also be withdrawn if a subsequent lodgement or instalment is missed, so the certainty is thinner than it looks on the day it is granted.

General interest charge

The interest the ATO applies to an unpaid balance. It compounds daily, and unlike interest on a genuine business borrowing it is generally not deductible. The rate is set each quarter and published by the ATO.

Integrated client account

The running account holding activity statement liabilities, payments and interest. The statement of that account is the document a commercial lender asks to see.

Lodgement status

Whether returns and activity statements have been filed, regardless of whether they have been paid. Lenders read an unlodged period far more harshly than a lodged, unpaid one.

Remission

A request that the ATO reduce interest already charged. It is discretionary, decided case by case, and it belongs with a registered tax agent rather than a broker.

Director penalty notice

A notice that can make a director personally liable for certain unpaid company amounts. The response window is short and it is fixed by the notice, not by your lender's timetable.

The order matters. Deal with the most expensive, least flexible debt first, and the rest of the structure becomes easier to arrange.

1. 01

   Size the gap honestly

   Build a thirteen-week cash flow with real dates: wages, rent, BAS, PAYG, superannuation, supplier terms, expected receipts. Fund the peak, not the average. Borrowing too little is a second application in eight weeks.

2. 02

   Match the term to the asset

   Short assets take short money. A receivable that turns in 45 days should not be funded by a five-year loan, and a piece of plant with a decade of life should not be funded by a facility that debits daily.

3. 03

   Count total cost, not the rate

   Add establishment fees, line fees, monthly minimums, valuation and legal costs, and any exit fee. Compare total dollars over the period you will actually hold the facility.

4. 04

   Check what the security does to your next move

   A general security agreement or a PPSR registration can block or complicate the facility you want in six months. Ask what has to be released, and by whom, before the next lender can register.

5. 05

   Decide what you want to be true in twelve months

   If the honest answer is one repayment, a clean tax position and financials a bank will look at, choose the option that gets you there rather than the one that clears next Friday and leaves the rest untouched.