Banks and Alternative Finance Companies can collectively meet all the finance needs of a business. The main financial relationship stays with the bank at all times, but Alternative Finance can sometimes offer solutions where banks cannot.
Quick takeaways if you’re in a hurry:
- There are a number of situations where a bank will be unable to extend credit to a customer, in these cases Alternative Finance is a great option
- Rapid growth can make it challenging to manage cash flow: businesses should look for short term funding opportunities
- Banks and Alternative Finance companies offer services that compliment each other, and ensure a business can maintain its cashflow position.
Read on: Alternative Finance and banks: an opportunity for collaboration
(estimated reading time: 6 minutes)
Whatever position a business finds itself in financially, it’s always important to know that there are alternatives. There’s no denying that the most cost effective solution for accessing funds is through a bank, and in an ideal world, a business would never have to look further.
But there are many situations where a bank is unable to support a business. While it is in the interests of both the business and the bank that the business succeeds, sometimes a bank’s stringent rule book means that they just cannot help even if they would like to. In these cases, referring their client to an alternative finance provider can offer the best outcome.
An alternative finance provider is not a ‘lender of last resort’. But in many cases they are all that stands between a business and a cash flow challenge . Following are common scenarios where banks and alternative finance providers can work together for their client’s needs.
Growing too fast
Customers who are experiencing strong growth and need further funding can sometimes find that their bank is unable to help. In some cases this is because when a bank chooses to lend to a business customer, they do so based on historical financial information – the last full set of financial accounts.
These can be quite dated depending on where in the year an opportunity arises, and are not always relevant to the forward-looking expectations of the business. So if a business is on a strong growth path they may find that a bank is unable to support them. In this case the bank can refer them to an alternative finance provider like Fifo Capital.
Another circumstance where banks can struggle to support businesses is where the business is seasonal and needs access to cash to support a large cost like the purchase of stock. Even when a business is seasonal, the bank will look at the annual financial performance to determine how much working capital funding they can give.
Because they will review the financial position across 12 months of the year for a business which may only be performing for three months of the year, the working capital requirement of the business will exceed the funding ability of the bank.
The rule of thumb for the bank is to offer working capital facilities of up to ten percent of annual turnover. If a business generates $1 million in business across a year, the bank will offer a working capital facility of only $100,000. This will be far below their actual requirements if their business is seasonal and activity is concentrated across a few short months.
This is another situation where a bank can rely on a alternative finance providers like Fifo Capital to support their business customers. In many cases where a business needs to purchase stock to support their seasonal activity, Fifo Capital is able to provide a Stock Loan. Stock Loans offer short term access to funds, and Fifo Capital takes on the value of the stock as security against the lending.
The amount of security available to a business dictates how much the bank feels comfortable lending. If there is a change to the security, or a change to the bank’s attitude to a business or a sector, then the amount of funding available can change.
Unfortunately this can mean that a business finds itself lacking the funds it requires for new opportunities or growth plans. If a sector goes from being in a strong position to being perceived as at risk – the dairy industry is a good example of this with its fluctuating milk prices – then the bank could even be forced to reduce the funding a business has available.
When a business experiences a change in its security status, it’s important that it has time to review its position. While a bank may find it is unable to support the business with funding, it can refer them to a lender like Fifo Capital who will be able to.
Fifo Capital works in partnership with businesses and the bank, in order to find a solution that will support the short term opportunity in order to allow them to return to a full lending position with the bank in the long term.
The focus is on seizing growth opportunities where they arise; avoiding negative impacts from changes in security; and creating a business that can continue to operate and grow successfully. The best way to achieve this is with a partnership between the bank, the business and Fifo Capital.
The advantage of a provider like Fifo Capital is that they are able to lend to a business based on their current financial position. As an alternative finance provider they have a security and fee structure that reflects their ability to lend outside the normal parameters of the bank.
Products like invoice finance require little security other than the the invoice against which the loan is offered. Any finance offered will not affect the business’s existing finance agreements. Short term business and stock loans allow businesses to top up their finances where the bank is unable to support them, and then pay off any debt quickly when their short term need has passed.
Because Fifo Capital is only a short term finance option, the business can enjoy fast access to the cash they need while they need it, and as soon as the opportunity has been taken they can return to their full relationship with the bank.
Invoice Finance, Cashflow Solutions and Business Loans
Fifo Capital are experts in cashflow solutions for small to medium business. Find out more about invoice finance and our fast business loans here: