Financial hard-times are far from uncommon among family businesses seeking growth. In fact, most will only live to tell the tale if they’ve overcome a few hurdles along the way, especially when the business has been passed between generations.
But these challenges by no means signal the end of the road. Quite the contrary.
More often than not, it is an opportunity to re-evaluate where you are heading, adjust your strategy and move forward positively.
In many cases, the problems are short-lived and easily fixed, but this doesn’t mean that you can take your eye off the ball. You should, no matter what stage of growth your business is at, have total control of its finances. You need to know what is happening right now and what will be happening in the future so that as little as possible is unexpected.
Poor cash flow management is one of the main causes of failure among growing businesses.
But by monitoring your cash flow, problems are likely to be foreseen; particularly if you undertake regular forecasting. So even if credit management processes have not been in place historically, they are worth implementing now; there will always be times when cash is at an all-time low and you need to be prepared.
Hints and tips for managing your cashflow with good credit management
A key customer may be late in paying you, a large order may have instigated an unexpected increase in stock levels or demand may require extra staff, temporary or permanent. Whatever the reason, it is likely that you need a quick fix.
Let’s discuss short-term finance.
It’s an interim funding solution that allows a business to keep operating in the here and now. It’s a means to tide you over, usually on terms over a maximum of 1-3 years.
A common solution is a term loan, otherwise known as an unsecured, bridging or cash flow loan. You agree with a lender how much you’d like to borrow, the rate of interest you will pay and the timeframe for repayment. And, if you have a good set of accounts to hand, no HMRC arrears and current bank statements at the ready, a business loan can be arranged in a matter of hours – assuming you meet the criteria. A comprehensive business plan may also assist you.
Check out our guide to writing a robust business plan for funding
But there are some considerations you should make before taking a small business loan. You need to understand if the interest rate is fixed or variable; a variable rate makes your forecasting harder. It means you will need to have a buffer in place for possible hikes in interest rates.
You also need to know if the loan is secured or unsecured. Depending upon the amount you’re looking to borrow, a lender may proceed on an unsecured basis, but may ask that a director acts as a personal guarantor for the debt. Where larger amounts of borrowing are involved, a secured loan will simply provide the lender with the reassurance that the finance is backed by an asset.
You just need to be confident in what you are offering as security because it will be in the form of property, machinery or equipment. And if you fail to keep up with repayments, you could lose this in return for clearing the debt. But always speak to your lender if you are having repayment problems, they are generally very accommodating.
An alternative option for generating a quick cash injection is invoice financing; the key benefit being that you can use it as and when required with a single invoice or selective invoice discounting solution. A lender basically buys your outstanding customer invoices, meaning you are borrowing against amounts owed to you. You will receive the majority of the value straight away and once your customer settles the invoice with the lender, you’ll receive the remaining balance minus the lender’s fee.
Cash in your pocket is almost instant in this case. It’s finance that can be readily available as and when you require it, with the benefit of no long-term commitments. The main downside, however, can be the higher transaction fees involved. Quick access to lump sums of money is never going to come cheap; you are paying for the privilege.
But if you are looking to avoid finance with higher running costs, in favour of one fixed repayment amount, then a business cash advance could be the solution. The advance is based on your future revenue predictions so your repayments will be proportional to your sales. And even better, the total cost of the finance is agreed up front. You only ever pay back the amount agreed at the outset, rather than being at the mercy of rising interest rates.
This is a great finance option for businesses who experience seasonal fluctuations in their sales because a key benefit is that you pay back more when your revenue is higher, and less when things slow down. In general, cash advances are more flexible than business loans because they allow you to borrow and repay according to the projected success of your business.
So, there are many options available for family businesses to overcome the short-term cash flow challenges they face. And it’s not a one size fits all outlook; different finance solutions meet different funding requirements. Not all lenders will be open to the same risk every time, and their lending criteria will differ from one loan to the next. Take the time to research and evaluate the best option for you each time a finance need arises.
If you are looking to raise finance for your business but are unsure of the options, or you simply find it difficult to get the terms you need, then we can help. Simply speak to one of our advisors.