Working capital and cash flow could become the biggest challenges you face over the months to come. With traditional credit sources under pressure, where should business owners look next?
As we head towards what could be a long recession, all businesses need to plan for the unexpected. If you have high levels of debt then credit terms are obviously a priority but even cash rich firms have to think carefully – nobody can be sure how any business will perform in the months ahead or what the banks will do next. What all business owners can do is to make sure that credit is available, appropriate and affordable.
Even when times were good, there was a price to pay for the convenience of a traditional overdraft. Banks are prone to imposing multiple fees and restrictive covenants and they have an unfortunate tendency to focus on your business’s past, not its future. In what are far more challenging times, alternatives matter even more than before – and not simply when you are facing a headline requirement such as an acquisition, exit or management buyout.
If your business is anticipating cash flow problems, the right finance planning can give you the day-to-day cash you need on the right terms for pinch points such as payroll stress or equipment replacement. If you’re lucky enough to encounter sudden business opportunities, sympathetic lending is equally important. What’s important to note is that there is still an appetite out there for lending to businesses and my own experience is that most businesses can be matched with the right provider, even now.
One very effective short-term alternative to conventional bank overdrafts is invoice discounting (also called accounts receivable financing). Your accounts receivable ledger represents an important asset in its own right and specialist lenders will consider it as security for a loan, often supported by other specific non-property assets and/or personal guarantees.
Typical invoice discounting lenders will allow you to borrow around 80% of your outstanding sales invoices and there are several benefits to this type of loan. You only pay interest on the funds you borrow, so you have the same day-to-day flexibility as with an overdraft. The arrangement is confidential, so you don’t send out the wrong messages to suppliers or customers, and you can access cash as soon as a sales invoice is raised.
An example of one recent success is a client who approached the CV Capital Corporate Finance team when bidding for a new contract worth £10m. Historically debt free, the business was used to relying on its own cash resources but the credit terms of the new, blue-chip clients meant that these resources were not sufficient. We worked with them to create a funding proposal document that went out to the invoice discounting market. The result was an attractively priced offer that increased working capital, secured the business and gave additional headroom for future new business.
Invoice discounting is far from your only choice and the right debt advice will review a whole range of issues such as your objectives, capital structures, potential lending issues, legal processes and more. What matters is achieving the right balance between flexibility and cost – and making regular adjustments so that your loans remain the best value over time.
For further information please contact Jason Metcalf or Debbie Clarke on 020 7509 9000.
