Small business options to ward off cash flow issues

There are many options for a small business that isn't getting paid promptly; here, we look at how to find the option that works best for your business.

It’s the word that no one will utter in polite conversation, but it’s often the first word a business owner will have in their mind when a client’s invoice becomes overdue. Let’s take a deep breath and say it together, cash flow.

The equation for good cash flow is simple, you provide your client with a product or service, you invoice the agreed price, and the client pays it in a timely manner. But, as business owners know, too often this simple process becomes worryingly protracted.

Cash flow issues can be the monster that keeps SME owners awake at night and can be a very real problem, even for otherwise robust and successful businesses with a healthy order book. Staff wages still need to be paid each month, even if the business hasn’t been. According to the Zurich SME Risk Index, more than half of Britain’s SMEs are owed money from late payments, with one in five being owed more than £25,000. It’s no wonder that many SMEs often resort to using company credit cards as a means of providing working capital.

Cash flow issues can arise under many circumstances, but are particularly common when an SME secures a large customer. While this is a cause for celebration, having a major customer on the books can bring its own challenges that will last long after the champagne corks have popped. Many large customers will expect suppliers to agree to 60 or even 90-day payment terms, which could be two to three times longer than is usual for most SMEs. This is compounded by the fact that servicing the contract may necessitate operational changes, such as increasing workforce, and increased overheads. But this is no reason to be fearful, it just requires planning.

Very often, cash flow issues can be avoided with effective and proactive cash flow forecasting, but there will be times when an external boost will be required. It may be that your clients take longer to pay each invoice, and your suppliers are chasing you for payment before your invoices have been settled, leading to time being wasted juggling the accounts each month and ensuring that the business continues to operate smoothly. Much of that responsibility could be falling to you as the business owner, on top of everything else, and your time is far better spent on your core business activity. The good news is that there are options open to you and prompt action can make all the difference.

Previously, only two main routes have been open to you: loans or selling part of your company. Both have their merits and drawbacks. These options can often provide a satisfactory solution, particularly in the short term, but both could have long-lasting effects that could limit the options available to you in future, thereby restricting growth. The key is to find the option that works best for your business.


This is the most well-known route available, and often the option that people consider first, with most SMEs naturally gravitating towards high-street banks. The structure is simple and widely understood. Funds are typically secured against capital assets, with interest being levied at the agreed rate, in addition to set-up costs and fees. This appears as an ongoing debt in the company’s accounts, and will be taken into consideration should any further borrowing be required in future.

Selling part of your business

The second option is to find yourself an angel investor, an individual or business that will purchase a share of your business. The normalisation of this option through popular shows such as Dragon’s Den has led many to believe that securing an investor is essential to ensure growth. This will depend on the business, and many investors also bring years of expertise and extensive contacts, but this is not always true, and some will just be seeking a guaranteed return on their investment. Many investors will be unwilling to turn their back on a successful investment, and so a share sold is often a share lost, and a hefty price to pay for short-term cash flow issues.

Of course, there are other ways to release funds, such as selling capital assets that you no longer need—although this is not viable as a long-term solution, given that these can be sold only once. However, while many people consider only tangible capital assets as being available for sale, there is more flexibility available to business owners in the form of invoices, which are generated regularly by businesses. An unpaid invoice for work completed is a sellable asset, and releasing funds from future payments can help to address short-term cash flow issues. This practice is known as invoice financing, of which there are two main categories, each of which offer several different products. There are however some important distinctions between these options.


Factoring is the most common form of invoice finance. Unfortunately it’s also the most archaic and least flexible product, meaning that it often doesn’t respond to businesses’ needs. This lack of development has led many business owners to shy away from using factoring as a method of improving cashflow, as the difficulties are perceived to outweigh any benefits. The terms can also be extraordinarily draconian, benefiting only the factor and not the business. The factor, whether a bank or factoring company, purchases a company’s entire sales ledger and controls the bulk of the money owed, and will likely charge up to 20 admin fees for the facility. The commitment can be quite onerous as you are committing to offering for sale all of your invoices, with no discretion to retain those invoices whose terms may be favourable to your business. In addition, the agreements are lengthy, and you could be tied in for several years. Factors also require security against your business and, typically, personal guarantees from the directors.

Invoice trading

This option appears to offer more flexibility, allowing a company to fund individual invoices, with online platforms providing the means to secure finance from investors—a form of peer-to-peer lending. In contrast to factoring, invoices can be sold individually rather than relinquishing full control of every invoice. It can seem attractive, as investors will bid for your invoices, but your application could result in few or no investors wishing to purchase your invoice and you will be unaware of the cost of selling the invoice until the final offer by an investor, thereby shifting all of the power in their favour. A lot of effort could provide very little in return.

Selective invoice financing

Invoice discounting or selective invoice finance operates differently and with considerably more flexibility as it allows businesses to retain full control of their invoicing, choosing which invoices they wish to sell, and doing so only when required. The overall percentage fee may appear higher than factoring, because fees are based on individual invoices rather than overall company turnover, as would be the case with factoring. However, selective invoice financing brings the considerable benefit of enhanced flexibility. In addition, the lack of ongoing loans against the business ensures that greater control is retained over the company, and no share of the business has been sacrificed to remedy a short-term problem. The business owner therefore is free to develop the business in whichever way they choose.

Ceri Rees is managing director of Jardine Norton.

Further reading on cash flow issues

Ben Lobel

Ben Lobel

Ben Lobel was the editor of from 2010 to 2018. He specialises in writing for start-up and scale-up companies in the areas of finance, marketing and HR.

Related Topics

Cash Flow