In many small medium sized businesses cash is always in short supply.

As a result investments may not materialize at the required time, suppliers may be paid later than contracted or the business bankers may require guarantees to protect overdrafts or loans.

Cash is the lifeblood of the business and a sustainable flow of cash into and out of the business is desirable. When that situation cannot be achieved the owner must seek alternative means of funding to protect the business. One source that should be considered is ASSET FINANCE.

Asset finance allows the business owner to use business assets to generate cash and to replenish the working capital requirements. This conversion to cash is usually done in exchange for a security interest in the asset that the owner may choose to use.

As an easy and quick method of generating cash for the business, Asset Finance will leverage the business assets to provide a cash injection.

There are different types of asset finance to be considered.

1. Perhaps the most popular form is advancing cash against outstanding account receivable balances. This is commonly called Invoice Factoring. The process entails the factoring service provider releasing cash against existing sales ledger debt and future sales invoices. The immediate benefit is that money is available to the business that otherwise would not be received until the expiry of the credit period allowed to the customer.

The factoring service provider collects the debt from your customer and levies a charge for the service against you.
The sum advanced by the factoring service provider will depend upon risk factors and negotiation but will generally be between 60% and 90% of the original debt.

2. An alternative to ‘lending' against the value of the sales ledger is for the finance provider to lend against the value of the stock held in the business.

This is less popular with providers than lending against accounts receivable. Although stock may be collateral against the money loaned, it is yet to be converted into sales and changes in design or fashion may lower the potential value of the stock giving rise to a higher risk in potential recovery value to the provider.

3. Whenever new assets are to be acquired instead of using cash within the business to purchase the asset, a Finance Lease can be negotiated that will allow the business to retain the money that would otherwise have been used to make the purchase.

During the negotiated repayment period the capital sum plus interest is repaid, easing pressure on the cash flow. For accounting purposes the Financed Leased item will be shown in the Balance Sheet as an asset of the business.

4. A Bridging Loan is a short term loan that is available to overcome the problems caused when inflows and outflows of cash are not matched.

This situation may arise when property is purchased and the funding would originate from the sale of an existing building or plot of land. Circumstances may prevail that necessitate the purchase being made before proceeds of the sale have materialized.

In order to ‘bridge' the timing difference between the outlay of money and receipt of sale proceeds, a loan is taken out enabling the transaction to go ahead.

5. A Sale and Leaseback arrangement allows a business to sell, for example a building, and immediately lease the building back from the buyer.

The selling business enjoys an inflow of cash and utilizes that resource to generate additional incomes to pay the future lease costs.

6. Exporters may require funding to support work in progress of large export orders. A pre-shipment finance arrangement will provide funding to ensure short term pressure on cash flow is eased and is normally arranged through a bank. This may be particularly appropriate for large export orders that require long cycle times to complete manufacture.

Author Bio

David Willetts is a qualified accountant (Fellow of the Institute of Chartered Management Accountants) and an Associate of the Institute of Business Advisers. He has headed finance functions and held operational responsibilities within small and large organizations. He now works with directors and owners of companies in developing solutions to the problems found in business life.

More details on David's background and experience can be found at DAW Consulting Limited. Also are you seeking a solution to your business problem then visit David's site at http://www.sme-business-solutions.com for your on line business resource