It is time to investigate your options for financing your commercial needs


IN THE current economic climate, efficient cash flow management must be at the top of the agenda for UK small and medium enterprises (SMEs). With the slowdown in the economy and increasingly high inflation, cashflow suffers, as customers take longer to pay their bills. But with wages to be paid, rent to be met and essential suppliers waiting for their cash, the challenge facing many is how to meet these demands and make funds stretch further.

But how can companies make sure difficult debtors don’t become a stumbling block in effective business management? With cash flow the lifeblood of any business, earning money is one thing, however getting paid can be quite another. In difficult trading conditions, payment terms are often expanded and everyone has to wait longer to be paid.

One solution is invoice finance, also known as sales finance. This can provide businesses with cash while they wait for payment from debtors. Invoice finance enables a finance provider to advance companies the money they need, using the invoices raised as security, thereby helping to ensure the business can continue to function and indeed invest in the future.

In addition to invoice finance, asset based lending enables businesses to release some of the value of their invoices and indeed other assets, such as stock, plant, machinery and property, giving use of the cash sooner rather than later. Invoice finance enables further investment in the business or can fund increased sales without the need to worry about cash flow.

Invoice finance is readily accepted today as a more dynamic form of raising funds, and can be an ideal solution to releasing the money needed to grow your business. Because it’s based on the level of invoices coming into the business, the amount of funds available grows as your business grows, so you don’t need to negotiate limits as you would with a traditional overdraft. It’s an opportunity to raise funds for various activities without using tangible security because the invoices themselves act as security.

Besides the more obvious and pressing needs of paying wages and suppliers, invoice finance can also be used for ongoing projects and can also help fund business growth, including management buy-outs (MBOs) and buy-ins (MBIs), turnarounds and acquisitions.

Also, because of the level of security available from the invoices, this form of funding may be able to release more cash than a traditional funding method would allow. Almost any business that deals with other businesses, and invoices them in arrears, can be considered. However, there are some industries that are not suitable for sales finance due to the way they structure invoicing and payments. It’s a solution that is particularly suited to the manufacturing, transport, wholesale and labour hire sectors, with high values of invoicing outstanding.

Many businesses have limited assets, but do have sizeable invoice debts owed. With traditional funding, it’s often difficult to secure funding against this asset, but invoice finance specialises in this area.

Typical examples may be for succession planning purposes where a sum needs to be paid to an outgoing director, funds are required to invest in new equipment or it may even be as part of a deal to buy another company. The need to access more cash tends to be driven by outstanding business requirements, sometimes a company may be growing very quickly and it needs to take on more staff or invest in larger premises.

These are undoubtedly challenging times for everybody and we are seeing a real trend towards customers choosing sales finance products such as invoice financing, factoring and asset based lending. Sales finance has long been a popular form of funding for small businesses as a temporary measure to overcome common obstacles, however, the current economic conditions have led to increasing numbers of businesses turning to sales finance as a viable alternative to fulfilling other business needs – a clear sign of its growing acceptance as an alternative source of funding to conventional debt.

With considerable uncertainty still hanging over the prospects for the UK economy, it is important that businesses change to stay alive. They need to make sure that they periodically review their situation, ensuring that their funding plans take full advantage of what is available in the market today. With straightforward cashflow financing now harder to access for many businesses, they need to identify alternative funding strategies that suit their circumstances. Introducing advisers at an early stage to discuss options works really well.

The range of professional advice available to management today has never been wider, and it is essential – before options become too narrow – to tap into it. Accountants, lawyers, private equity houses, restructuring specialists and banks are eager to provide advice and go over a businesses options. One of the most frequently voiced concerns by advisers is that they are often only called in when it’s too late and options have shrunk to a bare minimum.

As the economy recovers, businesses are going to need access to working capital. If conventional lending is not available or appropriate, then other avenues need to be explored. What will be critical is flexible finance that works in sync with the requirements of the business. Forward thinking businesses that properly consider their financial needs and match those needs with appropriate funding will ultimately benefit.