A Guide to the Financial Services Small Businesses Need to Succeed

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A Guide to the Financial Services Small Businesses Need to Succeed

Analysis by the Bureau of Labor Statistics shows that 20% of businesses close their doors within the first 12 months of operation.

In the face of the COVID-19 pandemic, a significant number of businesses that would’ve typically been operational have had to shut down. Amidst the chaos where every organization is trying to pivot, financial resilience has become a life-or-death requirement.

To help you place your business on firmer footing, here is a deeper look at four essential financial services you need to empower your small business. 

  1. Invoice Factoring

Invoice factoring is a financial service that helps small firms expanse their operations using external cash flow. Your business agrees to sell its unpaid accounts receivables at a discount in return for cash with invoice discounting.

The factoring company buying your invoices will pay you around 80% to 90% of the total invoice amount upfront. The financier will then follow up payments from your customer in full.

Let’s say you have a customer whose contract is worth $100,000. Once you deliver on the service and invoice them, you can sell the unpaid receivables to a factoring company.

The financier will give you $80,000 to $90,000. They will then engage your customer for the full payment on the invoice and make the remaining $10,000 to $20,000 as their margin.

Although you earn less on each invoice you factor, you receive cash upfront. You don’t have to wait 30, 60, or 90 days for the full payment, which is a worthy compromise to keep your small firm cash-rich.

Invoice factoring works best for short term needs such as:

  • Resolving short term expenses
  • Leveraging seasonal opportunities

If you need to solve short-term financial obligations, invoice factoring costs less than a traditional short-term bank loan.

However, using invoice factoring as a medium to long-term financing tool will cause you to lose a lot of margin and isn’t sustainable. Additionally, if your business does;t have a large customer pool, then invoice factoring may not be a suitable short-term tool to adopt.

  1. Business Line of Credit

A line of credit (LOC) is a preset borrowing limit your banker gives you from which you can borrow funds at any time. You can borrow up to the set limit but take funds out again once you repay.

The inherent value of a LOC is its flexibility since you don’t have to take out the entire amount. Unlike a traditional bank business loan, you only pay interest on what you borrow and not the whole amount.

As if that’s not appealing enough, you can also adjust the repayment schedule for what you borrow via the LOC. Depending on whether your LOC is secured or unsecured, you may not have to offer collateral for the utility.

A LOC can also be revolving or non-revolving. With a revolving LOC arrangement, you can take out money, repay it and borrow again in an unending cycle.

For a non-revolving LOC, you can take out the money as you per your needs up to the limit and replay. However, the facility doesn’t allow you to keep borrowing endlessly as the available credit pool won’t replenish once you repay.

For businesses that need recurring external financing, a LOC is a far better option than invoice factoring or short-term bank loans. If your small business has several loans, you can consolidate them using a LOC, giving you a lower annual percentage rate (APR). 

  1. Financial Planning

Financial planning isn’t only the reserve of big firms. Small businesses need to be proactive with their economic landscape if they are to service and grow. According to the folks at Johnston Shaw Inc, a critical reason to plan your finances is to forestall future unpredictability.

The most basic financial planning tactic for small businesses is to separate the firm’s accounts from personal ones. Unless you can distinguish these two sets of cash flow, you’ll end up damaging your operations.

Once you delineate these two, you need to run a cash flow financial analysis to understand if your firm is on sound footing. Without cash at hand to run the business operations, it doesn’t matter if you have more sales or assets on your balance sheet.

You’ll also need to consider how your firm grows its revenues over time as the business terrain changes. Scenario planning is vital to help you have a long-term view of your inflows and outflows in light of where your industry is heading.

As the adage goes, if you don’t plan, then you are planning to fail. Pairing scenario planning and business continuity can help fortify your firm’s resiliency in the face of market dynamism. 

  1. Tax Services

Tax compliance is a plague affecting small businesses as many underestimate the need to invest in tax services. Interestingly, looking at taxation start at the onset.

How you structure your business influences your tax situation. As you set up your business, you’ll need to hire a tax advisor to help you judge the most suitable legal structure for your small business.

If you didn’t make this investment and your firm is already operational, you should engage a tax advisor to walk you through your current structure. You may be sure you understand your firm’s entire tax landscape, but such a deep dive can uncover liabilities you weren’t privy to.

Making your tax structure lean builds cost efficiency that can make your small firm more resilient. 

Invest in the Appropriate Financial Services to Strengthen Your Small Business

Your small business has a lot going on, and from a financial perspective, it’s like herding cats unless you have a plan. You need to identify the relevant financial services your firm needs to level up on and draw a direct line to overall business health before putting in any time and effort for the best outcome.

Running a small business calls for intense dedication and skill. Our website features information to train entrepreneurs on how to streamline their business financial acumen. Check out more of our content to learn how you can add value to your small business’ financial capacity.

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