Have SMEs got the cashflow to tackle the new year slump?

Keith Softly, head of asset and invoice finance product, global transaction banking at Lloyds Banking Group discusses how SMEs can keep on top of cashflow now the festive rush has died down.

What can SMEs do to mitigate the effects of a slump in cashflow business in the early months of the year

What can SMEs do to mitigate the effects of a slump in business in the early months of the year

For many SMEs, after the excitement of the festive period and the January sales finally abates, mitigating the drop in cashflow caused by consumers tightening their purse strings can put serious pressures across all business functions.

To help bridge the gap, businesses and their supply chains need to ensure they have the working capital required to meet essential business costs, such as payroll and tax.

On top of this, the drop in footfall can make addressing any hangover invoices from the Christmas period and, if the firm doesn’t own its premises, any rent demands even more challenging.

2017 brings further challenges

This year, there are added pressures for firms and finance teams. The weaker pound has been welcome news for exporters, but importers and manufacturers are suffering from an increase in the price of goods and materials from abroad.

There have even been high profile disputes between suppliers and stockists featured recently in the media, as the weaker pound has increased input prices, resulting in thinner profit margins for some UK manufacturers.

Meanwhile, the introduction of the National Living Wage last year will also put further pressure on the business cost base as firms look to maintain the staff levels required for day-to-day operations.

It’s therefore essential that SMEs make the most effective use of the funding options available to them. However, firms can often overlook the full range of solutions, with the majority using only loans or overdrafts to tide them over.

Be aware of all lending options

Both invoice finance and asset-based lending, for example, can be valuable to firms facing the post-festive period slowdown by unlocking cash to help firms with their business plans for 2017.

Invoice finance works by releasing cash currently tied up in outstanding customer invoices. Invoice finance options allow you to release up to 90 per cent of the value of your invoices, typically within 24 hours, so instead of waiting 60 days to receive payment, businesses can improve their cashflow straight away.

This can be particularly helpful during the opening months of the year, when keeping on top of cashflow can be made even more difficult if the bulk of your business is done seasonally.

Asset-based lending, meanwhile, allows businesses that have capital tied up in stock, plant or property to use these assets to access cash. Money can be released from these assets into the business, which can then be used to buy more stock or materials to create goods, allowing firms to continue investing in their business when footfall is quieter.

Yet the latest Lloyds Bank Business in Britain report finds that awareness of these alternative forms of lending remains low.

Only 35 per cent of SMEs were aware of invoice finance, while 25 per cent were aware of asset-based lending.

Similar to invoice financing is supply chain finance, which is driven by the buyer instead of the vendor. The buyer’s bank provides cash advance to suppliers to ensure they get paid in time. Debt is repaid when the buyer settles the invoice. Suppliers pay the fee but get greater access to working capital.

Speaking to a trusted adviser can help those SMEs as they seek to take those opportunities without potentially damaging impact on their cashflow, allowing them to focus on having the right products and prices to appeal to consumers, rather than on the finances they need to protect their working capital.

Keith Softly is head of asset and invoice finance product, global transaction banking at Lloyds Banking Group.

Further reading on cashflow

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