The majority of SMEs find the first few years the hardest and it’s completely understandable. Do you have a sustainable idea? Can you realistically meet your goals? Are you able to cope with the start-up costs? These are very genuine problems which occur as most of the profit you make during those first few years, is normally put back into the business, to cover these initial costs.
But what are your options if you are hit with a large unexpected cost? Or if your payables are more than your receivables. All of these problems can lead to cash flow issues, which in turn means you might not be able to pay your bills or make payroll, which can put you into negative cash flow.
For most SMEs, it is make or break time and those that find the solutions usually pull through. So what can you do?
Planning Your Cash Flow Might Help You Get a Bank Loan
A lot of SMEs don’t initially start up with a cash flow plan and are effectively going in blind. Running out of cash is a major reason for businesses’ failing within their first year of opening. This can happen even if your business is profitable, as a lot of start-ups focus solely on profitability as opposed to cash flow. An accurate cash flow projection will alert you to any problems you might have coming up, but most importantly a cash flow projection is not just random guesses, they are educated estimates. It is important, to try to input variables, such as more profitable months or if you have shortfalls.
The second part to making an accurate cash flow projection is detailing when you might be spending each month and what on. A line of projection for each significant overhead, like rent, wages, fees and any other taxes.
Profit margins can often be misleading and sometimes it can be more effective working with smaller faster-paying clients, to begin with. How you collect your payments can have a huge effect on your cash flow, as well as possible loan opportunities.
Since the financial crisis banks have been resistant when it comes to loaning out money and they have seriously tightened up the criteria that businesses need to meet. Understandably if your business is suffering and having trouble maintaining healthy cash flow, it is unlikely that the banks will lend to you. However, if you can prove that your business is genuinely viable and has all of the necessary foundations to make a profit, then you could secure a loan. Banks will settle on a repayment structure with you beforehand, as well as interest payments, but usually, a loan will last for a minimum of 12-months.
Planning a bank loan can be a very stressful job. It requires a lot of admin, forecasting and planning, with most lenders wanting at least two years’ worth of company accounts. If you are having cash flow issues, going through that whole procedure can be frustrating when you are in urgent need of a cash injection.
Can I Try Invoice Financing?
Invoice Financing is a great option for B2B companies which are struggling with cash flow, but surprisingly not enough businesses know about it. If your company uses invoices, then you can effectively take out a loan based on the value of your invoices.
This is done by factoring companies, who will naturally asses the quality of your invoices and customers, looking at how likely it is that the invoices will be paid off, as well as how much they are worth. They will then lend you a percentage of your unpaid invoices, before collecting the debt from customers, taking out their own fees then returning you any remaining credit.
As opposed to a bank loan which is harder to secure in times of need, invoice financing can be a great solution, when it’s clear that your business is working. With a factoring company collecting invoices for you, it also frees up more time to focus on potential growth and maintaining healthy cash flow.
Managing Receivables and Payables
To avoid invoice financing or bank loans completely, shoring up your receivables can be an effective way of managing better cash flow. Simple things can drastically improve how quickly customers pay.
Asking customers to pay deposit payments can free up cash flow a bit more and means that you still have a credit coming in, even if invoices take longer. It’s also essential to issue invoices as soon as possible, then following up quickly if payments are still slow in coming. Carrying out a credit check on new customers can be a good way to assess how efficient they are at paying invoices, this can then, of course, be implemented into a cash flow forecast.
Large sales can sometimes mask a lot of problems when you are a relatively new company, so keeping an eye on your payables is crucial. A cash flow forecast would make this easy to see and pinpoint but to give yourself more time, take full advantage of creditor repayment terms. It’s also essential to stay in contact with your supplier and let them know about your situation, as a customer to suppliers they will want you to succeed.
You Can Survive the Shortfalls
Even if you have implemented a near-perfect cash flow forecast, sooner or later you will foresee a situation where you lack the credit to pay your bills. A forecast will most likely even show you this, but the key to dealing with this is becoming aware of the problem as soon as possible. Banks much prefer arranging lending to a business before they need it, ideally months in advance.
A business overdraft is perhaps the simplest solution to this problem, as it ensures that you have enough credit to deal with any cash problems. An overdraft allows you to have funds when your account goes overdrawn.
The overdraft limit will be agreed with the bank beforehand, which will be appropriate to the potential needs of the business and in turn the bank’s assessment of that risk. A company will agree on interest and the repayment of overdrawn money beforehand.
Banks can offer very helpful, useful business advice, particularly with start-ups. Being in contact with your bank regularly and knowing what kind of options you have available to you as your business develops can be invaluable.
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