Why a business loan to improve cash flow is not always the answer

Quite often the first thought business owners have when looking to improve their cash flow is to take out a business loan.

And it’s not a bad one. However, with business loans, the lender requires regular repayments to a set schedule with interest and fees charged on top. The repayment terms and interest rates can vary greatly, depending on the nature of the loan and the lender’s terms, and no business ever knows for how long it might need the loan when it is taken out. As such, loans may not be the best way to improve cash flow. We explore why in more detail below and consider other alternatives for improving cash flow.

Two key reasons why business loans might not be the best way to improve cash flow

While business loans can be a solution to improve cash flow problems, they may not always be the best solution. There are a few reasons for this:

• Applying for a loan requires an investment of time. Loans are a commitment over the medium to long term and you never quite know how much they are going to cost because interest is charged on a daily basis. While it may turn out to be cheaper than you thought (and you may not even need to use all of it) it could end up being much more expensive than you planned.
  
• Loans work best when the capital you receive is working hard for your business i.e., it quickly starts earning more than it costs. The reality, however, is often quite different, especially when using it to plug cash flow gaps rather than to invest directly in growth.

Invoice finance vs business loans

So how do different types of business loans compare to invoice finance? Well, bank loans, for example, often require a lengthy application and approval process. New and small businesses can lack the credit history and assets that the bank is looking for when evaluating a loan application, so it can be quite tricky for a small business to secure.

With an overdraft (a bank facility where you can withdraw funds in excess of your balance), you are creating a new debt which will accumulate daily interest charges on it.  You can also incur extra charges if you go over your limit, so it can be unclear how long you will be paying for it, and how much it will cost you in the end.

Some businesses also leverage credit cards as an additional loan facility, however, credit cards can come with very high-interest rates and if you can’t pay back what you borrow, your debt can quickly mount up. This can also impact your credit rating and ability to secure future funding. You can get hit with extra fees too, like going over your credit limit or being charged to use an ATM.

With invoice finance, you generate cash for work already delivered, meaning that you do not take on any new debt and you have complete visibility on exactly what the fixed fee will be for payment of your invoice, in full, within 24 hours, giving you complete peace of mind.

Why invoice finance can be a better solution to improve cash flow

Hydr can help businesses improve cash flow without the need to take on new debt/borrowings. Using our proprietary digital platform, businesses can activate the assets already on their balance sheet by accessing the cash tied up in those invoices that have been issued but have yet to be paid. This is done by invoice financing.

To date, invoice finance has not been taken up by all of the businesses that could take advantage of it, and one of the main reasons for this is that many invoice finance providers look and feel like a loan. They can have long application processes, fixed-term contracts, monthly fees, daily interest charges and directors’ guarantees. All of these can be quite daunting and pretty complex to navigate.

How Hydr’s invoice finance solutions work

Hydr is reinventing invoice finance and how it can improve cash flow by making it easier at every stage. Our technology gives you the power to access your money tied up in invoices within 24 hours for a fee that is fixed and transparent with absolutely no hidden extras. We pay 100% of the value of your invoices within 24 hours rather than the more standard 70-90% with the balance down the line. We’ve digitised and simplified the application and onboarding process which takes just 15 minutes and doesn’t require you to submit any additional paperwork. Our class-leading integration with Xero means that we give funding decisions in real-time, giving you access to your hard-earned cash almost immediately, with full transparency on what it will cost.