Many small businesses dip their hands in their pockets and use personal credit to keep their SMEs moving, but there are smarter funding options.
Mark Ryan, a director of Sydney small business Viking Legal Services, was regularly using his own credit cards to pay Viking expenses that were falling due before client payments were received
Viking Legal Services specialises in settlements, exchanges, lodging, court filing and property enquiries, with a client base of more than 65 solicitors and conveyancing firms.
The Sydney-based SME, which was established in 2005, really needed a more reliable cash flow solution. They found FactorONE, a division of Scottish Pacific Business Finance.
Mr Ryan, one of three directors in the business, had experience with The Scottish Pacific Group in a previous business, so understood how debtor finance could relieve cash flow pressure.
“With Viking, as with most small businesses, some clients pay quickly, others take more time and it was a constant battle for us to pay our bills,” he says.
“We might have more than $100,000 in billings at one time, but unless clients pay us quickly it is stressful trying to pay our own bills. At least four or five times a year, I’d cover those Viking expenses on my own credit card then be re-reimbursed.”
Viking now has a $100,000 facility with FactorONE, with the ability to grow above this as required.
“Our facility with FactorONE has smoothed out our cash flow, and it means a lot less work for me having to chase money or worry about when the funds will come in,” Mr Ryan says.
“It’s really taken the pressure off, because I don’t want to be constantly ringing clients and nagging for money – and the clients don’t want that either.”
Putting his hand in his pocket for his own credit card is a thing of the past. So is having to be reimbursed by the business for the interest payments incurred by paying for company expenses on his personal card. “We found doing this created tax implications. It became a major issue – by putting money in to the business via my credit card, it looked like we were making a bigger profit,” he says.
“I’d certainly recommend small business owners take a look at a debtor finance facility rather than rely on personal credit cards. Not just from the point of view of wanting to grow, even just for the peace of mind of smoothing cash flow.
“Debtor finance, once it was explained to us, was really not that tricky to get our heads around and it has saved many headaches. “Taking the fees into account, it is a reasonable business expense for the benefit of freeing funds and relieving cash flow uncertainty.”
While many SME owners seem to turn to personal credit cards as a quick and easy solution, it’s not automatically a case of poor cash flow management. Often it’s just the fastest way to solve a short-term problem.
Scottish Pacific’s March 2016 SME Growth Index found the number of SMEs resorting to personal finances (including credit cards with high interest charges) to support business growth was very high at 65.4 percent, with 17 percent regularly drawing on personal finances and 48.4 percent doing so occasionally. Only 10 percent of SME owners had never settled business expenses using non-business sources.
This poses significant concerns, because there are better funding options available to help SMEs grow.
How SMEs are funded has a significant bearing on operations, from how well they can manage cash flow to the pace at which they can expand. It’s crucial to get it right and not think too short term.
Personal finance may appeal from a convenience, speed and accessibility perspective – the downside is that higher than necessary funding costs cut directly into margin, and personal financing can impact on lifestyle and leave owners open to family conflict which can destabilise the business.
This has worked well for Viking Legal Services – as Mr Ryan says, “we now know that whatever we bill this week, we’ll receive within a couple of days. It takes the hassle and anxiety away.”
