Credit Card finance, the unhealthy alternative
Crazy as it may seem many small business owners are using their credit cards to finance their business and even save a job or two in the process. “70% of small businesses use credit cards as a form of debt finance” [i], Marian Edmonds has quoted this figure in yesterday’s AFR special report.
What are the banks doing about it? Very little, their fees and interest rates for providing this service is close to 20% or even more in some instances, so it makes more sense for them to extend this type of “credit”, it’s more profitable compared to lines of credits and overdrafts facilities.
When the big 4 banks get together and tell you of their inability to raise funds in the current global market is the cause of restricting business loan approvals, don’t believe it; there lots of sources that have not been tapped in as yet. Super funds for instance, not all are performing badly some have very healthy balance sheets and would invest in some worthwhile projects as long as the Government would provide them with the same guarantees for bad debts than banks are already enjoying.
You also have to consider the fact that Credit Risk Managers want to keep their jobs and they are not willing to stick their neck out if your business is struggling.
So what options does the small business owner have to raise capital? According to a 2008 CPA’s survey, 44% of businesses use debtor finance [ii]. So one can assume that businesses are searching more and more for suitable and accommodating finance.
Debtor finance increased popularity is based upon one its most appealing features, business self financing; not having to put up bricks and mortar to secure overdrafts or lines of credit gives small businesses an opportunity to rely on their own resources.
This type of finance is essential to those businesses without security to back up a loan, so chances of them getting credit are close to nil although, banks may offer them credit cards instead.
It is well known fact that small business owners do not chase payment of invoices, the CPA estimates the figure to be around 25% and to worsen their cash position further, they lack the appropriate systems to manage their cash collection.
Now is the right time to do some housekeeping and clean up your invoicing procedures; and if your objective is to improve your cash flow before the orders start flowing in, and they will. Stop using credit cards before their interest eat all your profit, look at finance alternatives; you will be surprised by the benefits of managing a healthy cash flow.
Article by: Ximena – [email protected]
About – Joined AR Cash Flow in 2008 with over 20 years of small business experience including owning and operating several small businesses, Ximena has become an important member of the team and dedicated Account Manger servicing clients.
________________________________________[i] Australian Financial Review 19.3.09
[ii] Slowing payment can choke small business, Chris Tolhurst