How alternative finance can support an SME’s cash flow

Fleximize’s Peter Tuvey examines how a new wave of alternative lenders are helping small businesses tackle their biggest challenge – cash flow.

The importance of keeping your cash flow under control cannot be overstated

The importance of keeping your cash flow under control cannot be overstated

Cash flow is a notoriously unpredictable element of running a company, and it can pose a number of challenges to businesses that are still in their infancy. In the days following launch, business can be erratic, sales may not be consistent and you’ll still be getting the hang of basic operations, all of which can make it tough to forecast monthly sales and pre-empt losses.

If these initial hardships are not stabilised quickly and for the long term, you could be compromising your company’s longevity. With 80-90 per cent of small business failures being caused by poor cash flow, and a study by Ormsby Street revealing that four in ten small companies fail to survive past five years, the importance of keeping your cash flow under control can hardly be clearer.

An alternative cash flow solution

In recent years, alternative finance has become an attractive option for small businesses that need to plug a temporary cash flow hole. In comparison to the lengthy process of applying for a bank loan, alternative lenders can often approve a loan within 48 hours, with some able to deposit it the same day. This quick turnaround is ideal for small businesses that require a short-term solution to an unexpected cash flow issue, such as a delayed invoice payment from one of their key customers.

While the lending criteria of banks tends to be quite stringent, the majority of alternative lenders are a little more flexible, meaning they’ll consider lending to companies with irregular cash flow. As long as a business has consistent revenues, and can demonstrate their ability to repay a loan, they’ll have a good chance of securing the funding that they need.

Most alternative lenders offer traditional fixed-term loans, but a select few also offer revenue-based financing, an innovative form of funding that links repayments to a business’ monthly revenue. Rather than repaying a fixed amount each month, a revenue-based repayment schedule lets a company share a percentage of its monthly revenue with a lender until a loan is paid off in full. This means a business will repay less in months when revenues are lower, and more when they’re higher, making it a good solution for seasonal businesses and companies with fluctuating cash flow.

However, it’s dangerous to rely solely on external finance to manage your company’s cash flow. Getting to grips with the bare bones of your business is also essential if you want to keep your cash flow under control.

Know your customer’s habits

It’s important to keep a close eye on the good, the bad and the ugly of your customers. By quickly identifying those who pay promptly, those who need a nudge and the culprits for prolonged unpaid periods, you can identify when money will be coming back into the business. Better yet, if you notice payments are not arriving quick enough, it may be time to offer incentives for quick repayments.

Make use of technology

We live in an era where technologies are constantly being developed to aid every business function, and thanks to the rise of fintech, small businesses can now automate many of their payment processes. There are plenty of apps that allow you to manage invoices, expenses and wages, so if bookkeeping isn’t your forte, your phone or tablet might be able to take care of it for you.

Apps like GoCardless give you the capability to set up direct debits without going through a bank, and when linked to a piece of accounting software such as QuickBooks, it will automatically trigger the payment process as soon as you send an invoice.

Look at your eligibility for government benefits

One benefit to keep your eyes peeled for is R&D tax credits. If you’re already investing a lot of your resources into research and development (R&D), you might be eligible for a 130% tax deduction on qualifying expenses, which could significantly lower your corporation tax liability. Your company doesn’t have to be profitable to qualify for R&D tax credits, and you might be eligible for a tax credit that’s equivalent to about a third of what you spend on R&D.

Understand the difference between profit and cash flow

Your business can be profitable whilst not having adequate cash flow, and seamless cash flow does not by any means suggest a healthy profit. It is crucial to avoid falling into a false sense of comfort when one performs better than the other. Trying to find a healthy equilibrium between the two is a mammoth challenge, but once this becomes second nature, your business will reap the rewards.

Peter Tuvey is co-founder and managing partner of Fleximize.

Nominations are now open for the British Small Business Awards 2017, the leading event celebrating the brightest stars in the SME sector. Click here to enter. Good luck! 

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