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Maintaining healthy cash flow is essential for the success of any SME. Indeed, failing to set aside funds to cover outgoings such as stock purchases, raw materials and business overheads is a major harbinger of small business failure.
“At the most basic level cash flow management is about collecting debts, building reserves, maximising supplier terms, paying down debt and buying more assets,” says Justin Williams, NAB’s Head of Trade and Working Capital Products.
Particularly during the early stages of the business life cycle, says Williams, it is critical to manage cash flow, or what is also referred to as ‘working capital’ while a business is growing.
“It is important that every business establish clear procedures for basic things like invoicing customers quickly, monitoring debtor collections, optimising supplier payments and taking advantage of any discounts that are available for early payment. It is also important to have a handle on the cash flow required to cover the fixed overheads such as rent and staff costs,” he explains.
Seasonal factors may also create cash flow issues for start-ups as well as more established businesses.
“These include retailers who set themselves up for a busy Christmas period as we see a lot of stock orders and imports between July and September,” says Williams. “You also have small businesses focused on meeting their quarterly BAS payments to the tax office for GST. So every quarter you’ll see some increases in the demand for cash flow.”
Likewise, manufacturing companies will have supply chain issues to address in order to maintain supply of raw materials and that also impacts cash flow.Generally speaking, the traditional “overdraft” remains an important lending product for short-term working capital needs. An overdraft “is a credit limit on top of a cheque account,” explains Rob Elliot, NAB’s Head of Business Lending. “Features include the use of variable interest rates, cheque book and electronic access”.
When choosing an overdraft, Elliot urges customers to consider the costs. “In other words, make sure you have access to the right internet banking, cheque books and so on and understand the costs around those features,” he says.
A business credit card can also cover “working capital” requirements. “Although,” Elliot says, “they’re generally used to cover payments rather than cash flow.”
Despite this, he concedes a “mum and dad” micro business might be better off with a credit card. That said, Williams says the traditional overdraft remains a fundamental method for meeting customer’s working capital needs.
“However, we get a lot of research telling us there is a definite migration to more cash flow-based finance, such as invoice financing. This is because it can grow as the business grows.”
With invoice financing (also called “receivable financing”), a lender like the NAB will provide funding up to a pre-agreed percentage of a customer’s debtor-book. NAB determines this percentage on a case-by-case basis.
“Basically, as the customer sales and debtor book grows, then we can extend more finance and we call this product NAB Debtor Finance,” Williams says.
NAB Debtor Finance works with existing NAB accounts. Funds are always available and can be transferred online to a working account or via an NAB Business Banking Manager.
The key feature with invoice financing, according to Williams, “is that access to funds is based on the strength of sales”.
“Instead of waiting for debtors to pay on their normal trading terms which might be say 30 or 60 days, NAB can provide that finance straight away,” he adds. “When the debt is repaid by the buyer, that is when we get repaid.” For more information about NAB Debtor Finance, visit www.nab.com.au/Business_Solutions.
With more SMEs operating on the global stage, managing foreign currency cash flow is also creating working capital issues. “Importers need to source foreign currency to purchase goods,” explains Williams. “If you are exporting, you’ll have foreign currency income that may or may not need to be converted back into Aussie dollars.”
When an exporter requires finance they can opt for trade finance or a more recent product development called NAB TradeAssist.
Launched recently, NAB wasn’t first to market with TradeAssist. However, Williams is unwavering in his belief that the product is superior to the competition, and “we looked right across the market and are confident that we’ve incorporated all of the best features our export customers want into the new TradeAssist product”.
In a nutshell, NAB TradeAssist is a working capital loan facility designed to give a business access to funds based on the strength of its international or domestic business sales. So, instead of waiting for your debtors to pay within your normal trading terms and depending on the strength of your sales, NAB will make available up to 100 per cent of the total value of approved sales invoices, provided you have suitable export or credit insurance from an approved insurer. As for the nitty gritty, there is a minimum loan amount of $200,000 but no maximum. Interest charges depend on the loan currency which may be in Australian dollars or foreign currency.
“NAB TradeAssist is perfectly suited to wholesalers, manufacturers and business services such as transport and storage,” explains Williams. “You’re really looking at businesses that are growing and the most important thing for the customer is that the product is designed to be really easy to do business with and has minimal paperwork.” If you have more questions about NAB TradeAssist, NAB Debtor Finance or need further assistance, contact your NAB Business Banking Manager.
