How to cope with a cash squeeze

More than three years on from the financial crisis and Britain’s legion of smaller companies, the lifeblood of any economy, still face an uphill slog when it comes to sourcing enough cash, writes Elliot Wilson

Working capital from the big-four high street banks is, if anything, as elusive as it was during the dog days of 2009. It remains to be seen whether the Coalition Government’s latest £20-billion credit easing scheme will help kick-start a recovery.

As Tim Breedon, chief executive of Legal & General, has warned, UK firms, particularly small and mid-sized enterprises, face a £190-billion funding gap over the next five years.

This is a daunting challenge, not just for the UK’s small and medium enterprises (SMEs), which make up 99 per cent of all British businesses, but also for the broader economy. Small companies must thrive in order to become big ones. And most “new” jobs are created in smaller furnaces by enterprising graduates, designers, engineers, and programmers.

As Jennifer Harris, co-founder of Board Intelligence, a consultancy that helps to improve the performance of company directors, notes: “If the perception among SMEs is that banks are not willing to support them, SMEs will lower their expectations. And if that happens, Britain’s economy will be in trouble for a very long time.”

Even in these anxious times, there is much that small businesses can do to stay afloat

Yet even in these anxious times, there is much that small businesses can do to stay afloat. Pennies should be pinched, but they can also be squeezed; there are ways to work not just harder, but smarter.

The trick, says James Meekings, co-founder of peer-to-peer lender Funding Circle, is to keep a tight control over your cash. “Too many SMEs look at current profitability rather than cash flow. Get the money in, then do business – it’s unwise to get ahead of yourself,” he says.

Intuitive and affordable accounting software can help you keep your books in order. Medium-sized firms often opt for Sage, a big British provider, but smaller enterprises also swear by software from QuickBooks, Kashflow or Xero.

Squeezing clients (gently) is also an increasingly fashionable pursuit. Smaller commercial entities have always struggled to get paid by larger, powerful customers. Call it a natural law; it has always been this way.

Yet this is slowly changing, thanks largely to the rise in popularity of invoice financing. Say a small fresh-produce maker is owed £10,000 by Tesco. In the past, that firm would send an invoice to central accounts and the store would pay within 30 days. For small firms, a month is an ice age. You’ve kept your side of the bargain, yet the customer is permitted to pay when they are ready.

Here, the supplier basically has two options. They can approach Tesco and ask for payment in, say, a week’s time, in return for which the customer cuts their invoice total by 5 or 10 per cent.

Or there is the option of using invoice financing specialists like Bibby Financial Services or MarketInvoice. These firms tide you over, stumping up 90 per cent of the invoice total (so long as your customer is credible) in advance and paying the remainder when Tesco settles its debts. In turn, the lenders extract a small concession, typically totaling 1 to 2 per cent of the invoice total, as a servicing fee.

In short, this is basically a business-to-business overdraft based on projected cash flow; you get the money when it’s most needed. Major banks also provide invoice financing, but their systems are often too slow for SMEs.

And there are other ways of sourcing finance. Ben Wilkie, editor at independent financial information provider British SME, notes that, while it’s hard to get a business overdraft these days, securing a business credit card “isn’t that difficult at all”.

Mr Wilkie also highlights the success of “crowdsourcers” like Crowdcube, where large numbers of retail investors funnel small parcels of aggregated cash into rising firms in exchange for stock.

There are other ways to hoard cash and expedite late payments. Use group-buying networks like Huddlebuy to cut input costs. Cut utility costs using uSwitch. Ease access to capital by improving your credit score, something many individuals but few corporates get around to doing. Also, get serious about chasing invoices. Companies like Tradeshift can help you by managing all your invoices electronically. If a payment is late, it will get red-flagged by the system.

And as Ms Harris, of Board Intelligence, notes, the key is to prepare for the future. “Ensure that you plan ahead,” she says. “Make cash raised during the good times last during the bad ones as ultimately, cash is the only thing that matters.”