When you first start up a business, your workspace isn’t the first thing on your mind. More important issues are buying the necessary tools and equipment, putting in place the right processes and then going out and getting customers.
But once things are up and running, you can then concentrate on your physical environment as well as what happens within it. For some people this environment is a desk in their home; others will have a workshop or warehouse. It might be a shop, restaurant or pub – or if you are mobile, your workspace might be your car or van. For tradesmen it is likely to be a construction site or a client’s home.
Either way there will come a time when in order for you to work most efficiently, your workspace will need an upgrade. New computer equipment, tools, furniture and even paint are expensive and require a sizable cash injection. Likewise, if you are planning to rent office space you will not only need a deposit but regular money coming into the business to cover daily and monthly overheads. Therefore the problem lies with finding the finance, especially if the revenue you are earning often comes in late from clients who have delayed on paying their invoices.
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What about an overdraft?
So, what about taking a business overdraft? Well, this can be a good solution in the short term but it is an easy way to dig your business into debt. Overdrafts are an unstable form of finance for businesses due to the fact that the bank can recall the debt at any time, or reduce your limit after reviewing your business finances.
If your workspace overhaul would include purchasing of new equipment you should beware of funding this with an overdraft. Because of the repayable on demand aspect of this type of loan, it should only be used for working capital.
Or a more stable type of finance?
If your business is profitable but you just don’t have access to ready cash due to cash flow issues, the answer to funding your workspace improvements could be invoice finance.
Invoice finance is a form of lending, but unlike a standard business loan, the cash advanced to you is secured against money your business has already earned and is owed. Invoice finance providers see your outstanding invoices as assets, against which they will lend money because they understand it will be paid back within a relatively short period.
Taking out an invoice finance facility primarily helps you stabilise your incoming revenue, so that you can plan for spend on overheads, and any large sums that need to be paid out – for example on upgrading your tools, equipment or premises.
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Factoring or Invoice Discounting?
There are two options to consider: Factoring and Invoice Discounting. With both options, the lender will advance a percentage of the value of a business’s outstanding invoices – up to 95% - sometimes within hours of the invoices being issued. The cost of the facility lies in the service fee and on interest charged on the advanced cash. When the client pays the invoice, the outstanding balance is settled and the debt cleared.
Many smaller businesses choose Factoring because in addition to getting their invoices paid on time, the provider can also take on the management of their sales ledger. The removal of such a time-consuming part of running the business can be a blessing for business owners who would rather concentrate on building relationships with their clients than pestering them for payment.
Invoice discounting works in a very similar way to factoring except that the business maintains control over the sales ledger. This makes it a more attractive option for larger businesses which often use the additional finance to fund investments and buy-outs.
Factor your finance into your business forecasts
Other forms of finance include business credit cards, loans and commercial mortgages if you wish to buy your own premises. However, the amount of the repayments and the length of the loan could be crippling to a business if not accounted for in cash flow forecasts and the business plan.
Don’t forget to include any expenditure on workspace and equipment upgrades in your business plan, and add any regular payments to your cash flow forecast. In doing so you will be able to avoid any nasty surprises down the line.
Then, all that’s left is to settle back in your new office chair, with your feet up on your new desk and a cup of tea in your new mug. And then workout how to use your shiny new high-tech equipment!
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This article was first published on Simply Business