When running a business, it can be hard to admit that you need financial help. You might want to control the issue yourself rather than resorting to a loan. However, external finance is not just an option for failing business – it’s a handy tool in the remit of every entrepreneur who wants to ease cash flow pressures and move towards their growth goals.
With data from the Bank of England showing that only 36% of SMEs utilise external finance, it suggests that not everyone is aware of the boost that funding can provide a business, especially when it is growing.
There are plenty of ways you can give your business a cash injection to get it back on its feet. The key is often understanding when you need it and finding a solution that fits your needs.
Below, we have examined the symptoms that suggest you could use a shot of finance into your operations and some of the options available in today’s market.
The 11 symptoms that show you might need external finance
There are many reasons that a business may need to utilise a loan or other form of funding. You’re likely to be the first to witness the symptoms and know better than anyone else when support is needed. By acting once an issue or need starts to arise, you can secure funding promptly and prevent the problem from snowballing.
- You’re receiving late payments of your invoices. As a business, you rely on your customers to pay you. When they’re late in paying – or even refusing to pay altogether – it will naturally have an impact on your cash flow as your income drops. Credit management practices can help, but you might need to utilise external funding to bridge the gap while you wait for your payments to come in and enable you to carry on covering your operational expenses.
- There are cash flow difficulties. There are many signs of poor cash flow. If you find yourself regularly missing payments or struggling to cover the liabilities of your business, it usually suggests poor cash flow. You might find yourself putting off bills because you don’t have the money in place just yet until you receive income. If you let the problem spiral, it can lead to a damaged credit score, increased inability to meet expenses and even bankruptcy or insolvency. As such, it’s advisable to deal with the issue quickly.
- You are struggling to make a profit. Generating a profit affects your ability to cover your expenses and invest in growth for your enterprise. If you begin to struggle to make a profit, it could mean you are only breaking even. While balancing your income and expenses is better than losing money, it is a slippery slope and can result in your business operating hand-to-mouth. If your profit falls further, it can lead to you running at a loss.
- There’s been a fall in revenue. Similar to declining profits, a fall in income can spell trouble. Once your revenue drops, you are left with limited funding to cover your outgoings. If your expenses don’t drop in line with your income, it could impact your cash flow adversely.
- You use your own funds to prop up the business. If you have to dip into your personal wealth, it indicates that your business finances are not stable enough to cope in their own right. It is particularly threatening as it could see you run into financial troubles as an individual as well as a business. Utilising a commercial loan rather than your savings can help to solve the issue internally.
- Sales growth is declining. The objective for every entrepreneur is to have a healthy rise in sales year on year. If your sales are declining instead, it could lead to decreased revenue and profit, turning into cash flow obstacles.
- You can’t pay salary increases. In an ideal world, your business profit will increase, and your staff salaries will rise with them. However, if you can’t pay promised salary increases – including bonuses – it usually means that you do not have the excess cash to cover them. This can go on to affect employee satisfaction and lead to even more issues.
- You regularly exceed your overdraft limits. While overdrafts act as a safety net for times that you cannot foot the bill from your existing accounts, using it should be a rare occasion. When it happens frequently, it is yet another sign of insufficient cash flow. Left unaddressed, it could lead to debt that is much harder to recover from.
- You hold too much stock and have a lot of capital tied up in it. While most companies need stock to operate, if it spends a great deal of time sitting in your warehouse, it’s money that isn’t getting used elsewhere. Your aim should be to turn your stock into sales as quickly as possible, and having more stock than you need could suggest you are over-ordering. By utilising stock finance, you can release the capital tied up in your unused stock and improve cash flow. It’s also worth readdressing the balance between your sales and goods.
- There are customer complaints and service delays. When a business is undergoing problems in satisfying its customers, it is usually symptomatic of problems elsewhere. This could include a lack of supplies or resource that enable you to create output and serve your customer effectively. If you are receiving complaints, ask yourself where the fault lies. If it’s cash related, external funding could help.
- You are pursuing growth goals you can’t afford. Expansion requires investment, and dependent on the level of growth you are seeking, it’s unlikely that you’ll have the capital you need sitting in your savings account. In this case, external finance can enable you to achieve your goals when you otherwise couldn’t afford them.
Funding solutions to help you
Now that you know the signs that you need external finance, it’s time to focus on what the right solution is for your needs. There are many forms of funding on the market, so it’s essential to do your research and consider the best one for you. We’ve listed some of the most common below.
- Stock finance – best used against goods sat in your warehouse, enabling you to continue to operate without straining cash flow.
- Invoice finance – releases cash tied up in unpaid invoices owed to your business.
- Trade finance – allows you to cover the costs associated with overseas trade, so you can fulfil orders while awaiting payment.
- Commercial loan – a traditional business loan is an excellent way of securing capital for your enterprise to be used against the cash requirements you currently have if you can take on the monthly repayments – this can be in a secured or unsecured basis.
- Sale and leaseback – if you have money tied up in your assets and equipment, selling those assets and leasing them back can be a helpful way to boost liquidity while still accessing the tools you need to perform.
- Equity crowdfunding – a form of fundraising where you ask members of the public to make small investments in your business. It won’t work for everyone but can be powerful when it does.
Once you’ve recognised that there’s a problem, you need to do something about it. Acting swiftly can prevent the issue from worsening and eliminate the risk of debt, insolvency and bankruptcy.
By understanding the role of external finance and being unafraid to utilise it in your business, you can solve cash flow obstacles, improve resilience and reach your goals.
Your accountant should be able to give you an impartial assessment of your problems, and there are always other professional advisors you could turn to for help. This is where we come in.
We can provide information on various funding types and work with you to find the best solution.
Get in touch today to find out more.