Tackling small business cash flow issues

Now is a good time for smaller enterprises to tackle cash flow issues.

Around 200,000 small businesses have problems accessing finance, according to Deloitte Access Economics. Access to finance is also the most common barrier to innovation, affecting about 400,000 businesses, according to Australian Bureau of Statistics (ABS) data.

Lack of cash is a major concern for small business owners but while lenders are likely to lend to a business with the best collateral rather than the best business, Adam Bennett, executive general manager for local business banking at theCommonwealth Bank, says now is a perfect time to approach your lender about any cash flow issues.

"With a more positive global and local economic outlook, historically low interest rates and improving consumer confidence, now is a good time for SMEs to consider increasing their business borrowings, to help them achieve top-line growth and increased profitability," he says.

With this in mind business expert Allan Mckeown, of Prosperity Advisers says your more likely to get a "yes" from your business manager if you keep the lines of communication open.

"Banks don't like surprises," he says. "Businesses who are seeking funding need to carefully consider the way they frame their finance proposal to their banker, positioning it in the best possible light. Understanding what banks are looking for will help you get it right first time and improve your chances of success."

According to McKeown, banks typically look for three major elements - commonly known as "the three Cs" - when assessing a business's credit risk.

This first is character, covering your repayment history and whether you do what you say what you will do.

The second is collateral.

The banks will seek all the first mortgage "bricks and mortar" security they can get their hands on, supported by a mortgage over your equipment and other business assets and personal guarantees from directors.

"Think twice about pledging all of your assets if you can avoid it as it limits your borrowing options in the future," says McKeown.

For newly established or early-stage businesses, Bennett says it is important to have a well-documented business plan, including financial projections with clear and realistic assumptions.

Home or no home, mainstream lenders do consider all types of collateral. Where no collateral is available, unsecured lending may be an option. However, responsible lending practices have limited the appetite around the types of unsecured lending made available.

Third, bankers want to look at your capacity. They need to know that your earnings are sufficient to pay back the loan without creating distress.

While it pays to negotiate the best loan rate, be sure it doesn't compromise other features you may want to use.

For example, most home owners would be aware of the benefits of having an offset account on their mortgage. Offsets exist for business loans but of the 40 term loan products assessed by researcher Canstar only five offer offset facilities. These lenders include AMP, ANZ, Commonwealth Bank, Suncorp and Westpac.

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