Cash flow issues are a common cause of stress for small businesses, and in some cases, can even lead to their demise. SMEs are reliant on their cash flow to expand, pay creditors, provide working capital, pay their tax obligations and purchase stock. Without a reliable cash flow, it’s unlikely the business will be able to grow and it may struggle to continue at all.
If a business is experiencing cash flow issues they don’t always know what the best solution is. While some cash flow problems require taking a look at the business processes and accounting to ensure that faulty practices are not the reason, in other cases the best solution may be a short-term injection of cash to tide the business over until it can get back on an even keel.
What are private finance loans?
Private loans, which can also be known as private second mortgages or caveat loans, are given on a short-term basis, usually for a period of one to six months. They provide a one-off cash sum that lets the business gain some relief from the cash flow issues and get back on top of the finances.
The size of the loan can be anywhere from $30,000 through to $2,000,000 or more. The interest rate is generally around 1-2% per month (12-24% p.a.) but can be higher, going up to as much as 4% per month, depending on the lender.
At Interim Finance, we provide the most competitive rates you’ll find anywhere for a second mortgage or caveat loan, at 1.5% per month (17.95% p.a.).
Four benefits of private finance for businesses
1. Private finance is more accessible than bank loans. This is because there are fewer restrictions on who can apply for a business loan through a private lender. The tight regulations involved in the banking industry mean it is often very difficult for smaller businesses, start-ups or those without a strong track record of success to get finance.
2. Having access to short term financial support gives businesses a chance to grow and expand that they might not be able to achieve otherwise. For many businesses that are experiencing cash flow difficulties, a very effective solution to their problems is often to expand so they can make more money. Unfortunately, expanding requires more cash and the whole situation can easily become a vicious circle. Private loans can break the cycle and allow businesses to grow and move forward into the future.
3. Private finance is often more flexible. Banks can be extremely rigid in their approach to interim financing and small business loans. This means that your clients could end up with a product that just isn’t suited to them. Because they are more flexible in their approach, private loans can be tailored more specifically to the individual business and their needs.
4. Quick access to cash. The process of applying for finance through a bank can be laborious to say the least. If your client’s business is struggling, having to wait a week or even a few days longer can make a crucial difference. Getting fast access to finance can help them get quick relief from their difficulties so the long-term damage to their business is reduced.
If you’re trying to determine the best approach for a client who needs business financing, there are a number of factors you will need to keep in mind. While it’s important to find the best solution that will meet the client’s need at a competitive rate, you also need to take the risks into consideration.