Whatever phase your business is in, it is all too common to run into cashflow challenges. Seasonal fluctuations can be tough (think about customer patterns around the end of year and in the summer holidays) and can often herald slow sales and late payments for SMEs whether B2C or B2B.
Additionally, many business owners have investment plans for their businesses, whether upgrades to equipment, refurbishment of offices, or additional staff and working capital for growth.
Whether you need additional capital to invest in your business or lower-than-expected income is causing you cashflow pain, there are plenty of financing and non-financing solutions that will allow you to manage your cashflow and keep your business thriving.
A financing solution may be the most direct way to access cash if you’re facing cashflow problems. There are many different funding options, each bringing its own advantages and disadvantages:
- Unsecured loan
An unsecured business loan is a short-term facility that provides funds for any business-related expenses. No security is required so interest rates for this type of funding are usually quite high. Most unsecured business loans must be repaid within 12 months, so they may not be a good option for business investment or longer-term cashflow challenges.
- Secured loan / overdraft
SME lenders will often require security in the form of personal guarantees from directors or shareholders. This reduces the cost of the loan, compared to an unsecured loan, but it means that the guarantor’s assets are at risk – if the company doesn’t repay the loan then the lender can make a claim against the guarantor. Loans secured by a personal guarantee will frequently be less expensive and easier to obtain than unsecured loans. Personal guarantee insurance may be available for part of the loan, which adds to the cost, but reduces the risk for the individual.
Often bank overdrafts are secured against personal guarantees from the business owner.
- Invoice finance
Sometimes called debtor finance, an invoice finance facility allows you to access funding using your accounts receivable ledger – the value of the invoices you have issued – as collateral. This money can be used for any business-related expenses and can be accessed as soon as your client invoices are sent. It is relatively simple to apply, and you can use your invoice finance facility when needed, so it provides useful flexibility to cover unexpected cash shortages. The overall cost can be high once fees are included.
- Personal loan
Many SMEs use personal loans to access funds for their businesses, however this solution carries personal risk as you – not the business – are responsible for repayments. Interest rates for personal loan products are also usually quite high.
Non-financing solutions for cashflow problems
If you’d rather not take on additional debt, there are changes you can make to your business operations that will allow you to reduce your costs and encourage customers to pay you faster. Even if you do opt for a funding solution to address your current cashflow challenge, these changes are worth considering and are fundamentally good business practice:
- Improve your debt collection process
Establishing your debt collection process – and sticking to it – is a great way to reduce the likelihood of repeat late payers putting a dent in your cash reserves. Your debt collection process should start on the day payment becomes overdue to show your customers you’re serious about on-time payment.
Consider charging a late payment fee to repeat late payers, and ensure you have a relationship with a trusted debt collection agency in the event you need to escalate an unpaid invoice.
- Tighten up inventory management
Taking a more strategic approach to inventory management can have a significant impact on your cashflow. If you’re not monitoring your inventory levels and doing regular stocktakes, there’s no way to know exactly how much of your cash is tied up in product that’s sitting on your shop floor. You may even be paying for storage space to hold stock that you don’t need for another three or six months.
- Automate your invoicing
An automated invoicing system can help you to get paid faster. Software such as Xero or QuickBooks allows you or an outsourced bookkeeper to email invoices quickly and easily, send an automated reminder on the due date if an invoice is unpaid, and access detailed reporting on on-time and late payers. You may even be able to include a link to support secure credit card payment on your invoice template, allowing your customers to make payment as soon as they open your email.
- Reduce your expenses
When did you last seriously examine your expenses? If cashflow is an ongoing challenge in your business, consider cutting back on non-essential spending. Examples may include:
- Reduce services that don’t directly produce revenue;
- Crack down on unnecessary spending on credit cards, consider comparison websites to check you’re receiving the best rates for services like gas, electricity, phone and internet.
- Work on your forecasting!
Whatever the root cause of cashflow difficulties, your life as a business owner will be more straightforward if you have a good cashflow forecast, for at least the next 3 months and preferably for a longer period. This can help you anticipate problems and seek solutions before cashflow begins to affect the healthy functioning of your business.
We designed the EFM Cashflow Healthcheck tool so you can easily get an indication of the financial health of your business. This review will alert you to situations that need to be addressed, so you have a better idea of where your money is, where it’s going and what you need to do, to stay in control.
If you’re interested in learning more about finance & non-finance solutions and whether it could be the right funding solution for you, EFM Ireland offers a free 1-hour consultation to understand your business and suggest appropriate funding options. Contact our central team via email or call 01442 8176.