Get your customers to fund your growth

One of the reasons businesses run out of cash – and generally go broke – is that they grow too fast.

What a paradox – the business is growing too quickly and is therefore too successful for its own good!Not surprisingly, in situations like these you also find that the largest “creditor” of the business is the Australian Taxation Office, due to either unpaid GST, PAYG withholdings, employee super or all three. In other words, the business has used the ATO as a banker. The obvious question is – why?

The broader answer is very simple – lack of access to alternative funders.

Sources of funding for your business

A typical family-owned business usually only has two sources of funding – the owners or the bank – and the latter option is generally only available if the owners have “bricks and mortar” security (i.e. their home).

Where the business owner has little or no equity in their home and/or the funding needs of the business exceeds the amount they can borrow against their home, the options tend to be very limited. Banks may still lend something against the assets of the business (e.g. stock and debtors), but the size of this facility is often a fraction of the assets pledged as security and the facility may not increase as the cash flow needs of the business increase.

Children taking over a business from their parents may also lack the amount of capital (or property security) needed to grow the business.

Family-owned businesses are also reluctant to call in a “white knight” (a friend with cash) or venture capital provider. In any case, the latter are generally not attracted to smaller “mum and dad” family businesses. This therefore only leaves two sources of funding – business creditors and the ATO. Business creditors tend to get looked after as the business owner wants to ensure

supply of raw materials to their business, which just leaves the ATO.

One often overlooked source of funding may be to “borrow” against the debtors of the business through a debtor finance arrangement (previously called factoring).