Small Business Finance
Episode 40: Introduction to Finance
An Intro to Invoice Finance
Although there are many ways to mange cash flow into the business , it is imperative that the business owner understands the ways cash moves in the business and manage it effectively in order to stay afloat. All cash advice becomes redundant when small business owners find themselves in the middle of financial struggles, however with a proper understanding on invoice finance will help the firm maintain a healthy cash flow.
There are many companies that offer financial help to small businesses, however there are different factors that should be put into consideration. One of the most commonly talked about cash flow solution is invoice finance, most people ask themselves what is invoice finance and when should you use it? Different people have their own name referring to the same some call it debtor finance, sales finance, receivable finance, cash flow finance among others. however invoice finance is simple to understand, it is a method in which the business use its debtors book as a release and security of up to 85% of the cash tied up for money due from the unpaid invoices.
The company offering the cash flow will use it as a guarantee to offer the small business cash to maintain its survival or make further stock purchases. This type of financing can be used if your business is usually relying on temporary staff and wait for invoices to mature after a month or so. Here you can use your debtor’s book to seek immediate cash to pay off the employees to keep the business running as you wait for you invoices to mature after a month. Invoice finance covers three main categories of finance solution although in most scenarios, although the aim is still the same freeing the business from financial dilemma, the categories include factoring, discounting and asset based lending.
Different Types of Invoice Financing
In this class, the financing company will take up the management of the firm sales ledger and credit control to assure them of the incoming invoices. In simple terms the company purchase the invoice for a large percent of their worth and give the small business the cash needed, thereafter they will follow up with the debtor using the normal protocol. Most small business can make use of this because they lack the essential facilities to manage their own credit control.
This is similar to factoring in that the financing company releases cash to the small business while using the invoices as security; however, it is more confidential because the customers are unaware that the invoices are used as security. However unlike factoring the small business retains its credit control management, it is a safe move if you do not want your clients to know that their information is used.
Unlike the predecessors asset based lending is just like as the name suggest the lending company will release cash to the small business and use business assets as security. The assets may include equipment, machinery, property, stock among other key business properties. It can be used when a small firm wants to raise huge sums of money.
3 Ways To Get Cheaper Vehicle Finance
For a small business in New Zealand that needs to buy vehicles there are three ways to get cheaper vehicle finance:
A Finance Lease is an option often used by small businesses because it of its advantages. This option allows you to afford better vehicles than would be possible otherwise.
The charges for a finance lease are included in the monthly rentals and they are calculated on the vehicle price excluding the G.S.T. The lease term is usually between 12 and 45 months. At the expiration of the lease term the lease’s balance is due as a residual payment.
Among the benefits of a finance lease are included:
- is no kilometre restriction for the finance lease contract
- the finance charges are reduced because the monthly payments are calculated on the vehicle price excluding the G.S.T
- the lease term influences the G.S.T benefits and tax
- the residual payment and the advance rental can be changed
- financial lease contracts are affordable ways to regularly update a small business’ vehicles fleet
- you can free your money for other purposes due to low monthly rentals
- you will have the opportunity to buy the vehicle at the end of the financial lease for only the residual value
An operating lease requires you to pay a monthly payment at a fixed rate for using the vehicle and at the end of the contract you will have to return the vehicle. You can choose the lease term, which is usually 36 months. Lease payments depend on the lease term, vehicle model, and your estimated usage in kilometres. If you are looking for car finance in Auckland this can be a good option.
Benefits of an operational lease:
- if G.S.T registered then G.S.T can be claimed each month
- for vehicle disposal you do not have any responsibility or residual risk
- with an operational lease contract you can keep existing credit lines
- it is easier to budget with established monthly payments
- your balance sheet will not show the vehicle
- the lease payments may include the maintenance costs
- you can have tax deductions for the lease payments
An agreement for Hire Purchase makes a very effective way for small companies to finance the vehicle purchases. With this type of finance agreement you have to pay the monthly agreed amount at a fixed interest rate. The terms for hire purchases agreements typically vary between 6 and 60 months.
- the monthly payments are easy to make and can suit your budget
- the fixed interest rates are at competitive levels
- flexibility to arrange the term, initial deposit, and monthly payments in order to better suit your situation
- the balance sheet shows the vehicle as an asset
- if you will use the vehicle only for business purposes, interest, G.S.T and tax can be claimed