Research carried out by the British Business Bank in 2019 taught us that 56 per cent of SMEs used finance in the previous three years. Most commonly, this finance is made up of bank overdrafts, credit cards, and loans from individuals, closely followed by bank loans and commercial mortgages.
Since 2020, you’ll know from your experience running a business that the need for emergency funds was exacerbated by the coronavirus pandemic. Businesses shifted away from the most common forms of external finance to utilise government-backed finance schemes and support.
Small businesses have faced a lot of uncertainty and hardship in the last year. But cash flow worries aren’t unique to big unpredictable world events. No matter what the external circumstances, cash flow problems can cause even the most seemingly successful businesses to fail at the best of times.
If you need capital to get off the ground or to grow, funding might be the best option
You may be considering external funding in order to meet your ambitions for growth, whether that be in the early stages of a start-up or later down the road when you want to take it to the next level.
There are a variety of options for external funding including bank loans, borrowing from family and friends, crowdfunding, and business grants and loans.
Here are some of our top recommendations:
See what’s available from your own bank
Get an overdraft or an extension on your overdraft as a safety net if possible.
Look at Iwoca
It only takes minutes to apply for small business funding from Iwoca, and funds could be in your account in hours.
See what’s available from The British Business Bank
Have a look at what’s available to you in loans and other financial support.
Look at business loans from The Funding Circle
You can check if you’re eligible and apply in 10 minutes and borrow for 6 months up to 5 years.
We’re able to put you in touch with brokers, if you require it
Give us a call to chat through this option personally.
Invoice financing could help cover working capital as you grow
How it works:
An invoice financing provider will lend you money against your customer invoices, in
order for you to get the cash value immediately rather than waiting weeks for it.
If you have cash flow issues in general, look at invoice financing – it can be expensive, but if you know you’ve got wages to pay every month and you know you won’t get paid for 90 days, it gives you upfront money.
If you only need a quick and small amount of finance – go for an overdraft or maybe company credit card. If you’re factoring invoices is in effect an overdraft secured on your debt. It’s fully legit and there’s no shame in it. Under the right circumstances, we have recommended our
clients take advantage of invoice factoring.
In our fourth year of working with our clients Subvision, we were able to get an invoice financing agreement in place, in order to help cover the working capital gap as they grew. This helped owner Jim, big time, as he was able to fund 80% of his debt up front. A major financial stress was avoided. You can read more about Jim’s experience with invoice financing and his journey here: How full financial support helped Subvision Surveys propel from side hustle to £1.5 million in turnover in eight years.
Remember, as your turnover grows, so does the amount you can borrow. If you double in size, your expenses will double in size. Costs will go up, wages will go up and you’ll need more cash – and your facility will go up too.
Can you improve your systems first?
A big injection of cash may seem like the only option sometimes. But there may be internal changes you can make in the business to improve your cash situation.
Though we don’t have control over the external circumstances, we do always have control over how we run our businesses.
Before we talk about how to get more cash into the business, let’s make sure we’re not spilling more cash than is necessary out of it. Especially during times of economic hardship, when every penny counts.
Review your budget to see where you can cut costs in your business
Do you know how much money is coming in and going out of your business in any given month? If the answer is no, you need a business budget.
If you’re running your business on guesswork, there’s a good chance you’re spending money in places you didn’t know you were, and you may be spending more than you’re making.
If you’re on Xero, a budget can be generated using two key financial statements: The Profit & Loss and the Balance Sheet.
- The Profit and Loss = a summary of your revenues, costs, and expenses incurred during a specific period of time
- The Balance Sheet = what your business owns (assets) versus what it owes (liabilities).
If you don’t have a good accountant and good accounting software, you can start by creating your own budget in a document.
- List out all your sources of monthly income
- List out all your fixed expenses – your rent or mortgage, your bills, insurance etc.
- List out all your variable expenses – costs that changed in relation to variations in sales and production – materials, billable wages, commission etc.
Once you know what you’re earning and what you’re spending each month, you may find it’ll help your money situation to make cuts in spending. There are ways you can do that, without putting the integrity of your business at jeopardy. Here’s a helpful blog with 10 ways you can cut costs in your business without losing productivity.
Can you get money in quicker?
You could be doing the very best work, on deadline, everytime – but if you’re not getting paid on time, you’re going to face some problems.
Late payments is the great business crippler – and whilst you can’t control all of your clients actions, you can create systems in your business to encourage a faster payment culture.
If you haven’t already done the basics:
- Set clear payment terms that work for your business – It doesn’t have to be the traditional 30 days if it’s hurting your business. Set it for a week or two weeks if needs be. Shout about them, and stick to them!
- State your terms clearly in all new client information, on your website onboarding process. And don’t ‘let people off’. Stay strong.
- Allow different payment methods – Payments will take longer if you’re using slower payment methods. Allow for direct bank transfers from a variety of banks, PayPal, etc.
Xero makes the whole payment process a lot easier and faster.
It’s impossible to really know where you stand or make changes if you’re not able to see your key numbers. To learn more about how Xero can save you time and improve your processes, check out how we work.
If you’re already on Xero, let’s get these basics nailed.
- Set up your invoices in Xero (and set them to repeat) – Create a new personalised invoice in Xero and add all the billable items. Set up repeat invoices for the clients you can – it’ll be a huge time saver.
- Add payment details for your clients – You can set Xero up so that clients can pay you instantly online from their invoice. Fast payments!
- Set up your own automatic prompts – Xero has a simple payment chasing email – set it up to automatically email customers to prompt payment.
- Send an invoice on your mobile on the go – Just another way to get a small win. Set up Xero on your mobile, so you can send an invoice as soon as a job is done, wherever you are.
Use an app like Chaser to chase late payments automatically.
Xero does have changing capabilities in the software itself – but if you really want your credit control managed efficiently, we recommend an integrated app called Chaser.
Chaser connects to your accounting system, and lets you generate a string of templates to nudge your customers at various points when a payment is due and overdue.
Chaser can be running in the background, and cash can come in, without you needing to remind clients yourself. Beautiful.
When cashflow is rocky, funding isn’t always the answer
If you need a big injection of cash to meet your ambitions, external funding can be the best opportunity for you.
But hopefully this blog helped you to see that your cashflow really can be in your control. Make sure your systems and processes are working in favour of a healthy cash flow before you apply for funding. You could be getting yourself into more debt and more negatively impact your cash flow down the line if your systems aren’t set up to support it.
Since there’s so much to learn and structure, we wouldn’t be doing our duty if we didn’t offer you our support in making these changes in your business. If you’d like help with anything in this blog, from setting up Xero and apps, to getting payments in the door faster, to accessing funding – we’re here for you.
Ian Butler
Director
Ian Butler is the Director of Golding Accountancy and has over 12 years of experience working in large accountancy practices. He founded the firm with a strong focus on providing personal, practical support to business owners. Ian specialises in helping clients understand their finances and improve profitability through straightforward advice. Outside of work, he enjoys BBQs and sci-fi films. Ian recommends tools like GoCardless and Stripe to help businesses get paid more efficiently.
