Every week, small and medium-sized firms across the UK are forced into insolvency because they run out of cash. While it doesn’t make the headlines, except perhaps in the local papers, the impact on individuals can be dramatic. Jobs are lost, assets are taken away and commercial ambitions are seriously damaged, if not destroyed.
A cash flow crisis can come almost out of the blue
No business that wants to have a future will deliberately run out of money. But that does not prevent it from happening. Often the journey towards insolvency is a subtle one, with one event after another having a negative effect on cash flow.
Customers pay slightly later and later each month, costs creep up, and finding the money to pay staff becomes a little harder each time the payroll is run. It’s too easy for business owners, caught up in day-to-day operations, to miss the warning signs.
The critical point could simply be a hold-up in the settlement of a particularly large sales invoice or needing to pay a large VAT bill to HMRC. The result is a creditor taking action for insolvency, at which point the business struggles to keep functioning as cash flow becomes an issue.
Taking steps to prevent financial disaster
The first step to avoiding a cash flow crisis is to assess the risk of it occurring, and what might cause it. If your business is reliant on the prompt payment of its invoices in order to continue trading then it’s worth evaluating the options option to you for raising working capital at short notice.
Example forms of finance could include extended credit from the bank, invoice finance or personal loans from friends or family associated with the business. The evaluation of options should take into account how long it might take to access funds, and the degree of flexibility within the various lending options.
You may not be able to approach friends or family and if you have to go to the banks it could take several weeks to get credit in place. For example, an overdraft, if available, would be for a fixed amount only and might not be a great long term solution. Additionally, some businesses may find it difficult to secure loans and other forms of credit which may increase the time taken to find a solution and put the business under further financial pressure.
Alternative forms of lending such as invoice finance can be a good solution for cash-strapped businesses as they are directly linked to the level of debt on the sales ledger. When a company requests a loan, the banks typically focus on the credit-worthiness of the business requesting the loan. However, when it comes to invoice finance the provider will instead focus on the credit-worthiness of the debtors (i.e. the customers who have received goods and/or services). As such for some businesses it can open up financing options which would otherwise not be available to them.
Whichever solution is right for your business it’s far better to have plans in place ahead of time, so that if you find you’re suffering from cash-flow problems you can take the necessary steps to alleviate them.
This is a guest post by Jasper Martens from Simply Business who offer a range of Invoice Finance solutions.