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Help, I Need External Funding! Emergency Business Finance Explained

Image of £20 and £50 notesImagine this: a bakery discovers one of its ovens is broken. This certainly means reduced production, and therefore less revenue, and it could quickly put the business at risk if it can’t be replaced soon.

But not every business has enough money sitting aside to buy new machinery outright, and in emergencies like this you may need external finance very quickly.

There are many other reasons why a business might need external funding too. Whether it’s to steady your cash flow, to pay your supplier for a larger order than usual, or to prepare for peak season, almost every business will find themselves confronted with tricky circumstances at some point.

Luckily, there are a number of lenders and funding options that can help you in these situations, and some types of finance are specifically designed for speed. Let’s take a look at some emergency situations, and the most suitable finance for each.

My customer hasn’t paid me yet

You may know the struggle of landing a new project and needing to pay your suppliers to start the next job before you’ve been paid for the last one. Many businesses have payment terms up to 90 days, and it can leave some businesses struggling with cash flow. Of course, you don’t want to turn down the new contract, which may lead to better revenue in the future — so how can finance step in?

In this situation all your business needs is a short-term cash flow boost, which can be made with invoice finance. With this type of lending you’ll be given an advance based on your outstanding invoices. Most of the amount you’re owed can be paid out immediately, and you’ll get the remainder minus the lender’s fees once your customers have settled their bills.

Your payment terms will be effectively reduced, so you can take on new projects without having to wait for your customers to pay you. Wholesale businesses especially can benefit from this type of funding. And if you’re trading overseas, trade finance can help you bridge the cash flow gap at the start of the trading cycle by paying your supplier for goods.

My machinery broke down

If your business relies on an asset, emergency finance can be especially useful. For instance, if you’re a manufacturer, you will want to replace a broken key piece of machinery as quickly as possible. But what if you don’t have enough capital available to buy it right away?

Hire purchase can help you purchase new machinery but spread the costs over a set period of time. You’ll own the asset immediately, and pay it off in more affordable monthly repayments.

On the other hand, equipment leasing is a long-term rental that allows you to use an asset for an agreed period of time and pay monthly. In contrast to hire purchase you won’t own the asset, and once the contract is up you’ll need to return the equipment. However, this gives you the flexibility to upgrade your machinery when you start a new lease.

My seasonal business struggles with cash flow gaps

Many businesses struggle with poor sales in their off season, while others struggle to handle the peak time before Christmas. Although these situations are very different, both can leave business owners worrying about cash flow.

Revolving credit facilities are similar to business overdrafts: you can withdraw funds from your pre-approved credit limit whenever you need them, and pay interest only on what you’re using.

This type of finance can either tide you over until your sales have stabilised, or enable you to buy more stock, hire more staff, or get additional warehouse space to manage higher demand than usual.

Once you’ve paid back a certain amount, you may be able to draw down more funds as long as it’s within your credit limit. All these factors make revolving credit facilities similar to a business loan that can be renewed automatically — which is why they’re called a ‘rolling’ agreement.

My sales business needs an advance

A very useful type of borrowing for retail businesses is merchant cash advances, which are based on your future card revenue. This means the lender will look at your recent sales volume to work out what you can afford to repay.

With this type of finance you’ll effectively sell your future card sales to the lender at a discount. The repayments will be taken automatically from your card terminal, so you don’t have to worry about missing repayments, and instead of an interest rate you’ll have to pay a fixed fee, so the total cost is agreed upfront.

Perhaps the best thing about merchant cash advances is that the amount you repay is proportionate to how much money you make, so every transaction through your card terminal is another small step towards paying off the fixed amount agreed at the beginning. This makes them a popular option for retailers.

Final thoughts

Whether it’s finance to bridge a cash flow gap, or to empower your company in a period of high demand, it’s good to know that there are options that can help you in any kind of emergency.

The funding you could apply for will usually depend on what you need the emergency finance for, as there are many tailored products out there that are more suited to particular situations. If you need help to find the right finance for your situation, Funding Options can help you narrow down the search.

Conrad Ford is Chief Executive of Funding Options, recently described by the Telegraph as “the matchmaking website for small businesses and lenders”. Funding Options has been selected by HM Treasury to help businesses find finance when they’re unsuccessful with the major banks, as part of the Bank Referral Scheme that launched in November 2016. @FundingOptions