Funding Working Capital for Cash Flow Management

With things like extended customer payment terms, salary payments and increased utility bills, it’s not surprising that you find yourself under pressure from time to time looking for assistance to bridge the gap while waiting for payments owed.

It’s the unexpected costs that can cause the biggest headaches to businesses. And research shows that one of the biggest costs to your business is unpaid bills. But there are funding options you can take to reduce the risk. And better use of technology helps too.

Bibby Financial Services research found that nearly 70 per cent of SMEs questioned believed it was taking significantly longer for customers to pay their invoices in full, putting pressure on their cash flow. Indeed, many reported saying payment terms could be anything from 30 to 90 days, leaving them with a gap in working capital funding.

Having great conversations with suppliers to understand their challenges and better monitoring of your cash flow can give you a greater insight into how you can effectively manage your working capital.

Understanding and managing the shortfalls puts you in a stronger position to do better business. It honestly doesn’t matter what size of business you are, you’ll come across trading periods that impact your working capital. The answer is to address it before it becomes an issue and stalls your growth potential.

Using technology more effectively can be beneficial in being able to maintain a solid cash reserve. For instance, automating payment reminders to clients provides a friendly nudge and offering a diverse range of payment methods can help streamline payments and reduce delays.

How you can mitigate against payment cycle issues

Several factors can disrupt a payment cycle. Delayed customer payments, inaccurate invoicing, an economic downturn, a sensitive political decision, the stock market, an economic downturn, so many factors.

In order to effectively manage the often thought of as unmanageable, you can instigate a variety of solutions to help manage your cash flow.

In our experience, it’s better to have clarity over payment terms. For instance, by offering preferential terms for early payers, addressing discrepancies immediately, using automated invoicing and reminders to minimise delays and having a robust customer validations system in place e.g. proof of delivery, all works.

Ensuring your customer base is diverse also helps.

Being able to maintain a cash reserve can lessen the impact of economic downturns as well as build and maintain your reputation as a business worth doing business with. Being consistent with your payment expectations and obligations helps drive deeper, stronger conversations that show you are a business to be trusted. Knowing who you can turn to, because you’ve implemented working capital options, also helps balance your cash flow. The key is knowing your working capital cycle. Knowing your clients. And knowing your trusted financial partners.

Funding Options for Working Capital

Working Capital Funding Options are the answer for many businesses seeking to alleviate pressure. But what is working capital funding? How do you access it? And does it really help your business to grow?

First off, let’s look at working capital. Put simply, working capital is the difference between your current assets and your current liabilities.

Current assets include cash, inventory and accounts receivable.

Current liabilities include accounts payable, short-term loans and other financial obligations due within 12 months.

Your working capital is the liquidity available to your business to meet your everyday operational needs. We recommend that all businesses have a cashflow forecast to keep on top of ins/outs.

So what funding options are available to give you more control? Here we look at Invoice Finance, Bank Overdrafts. Business Credit Cards, Asset Based Lending and Supply Chain Finance.

Invoice Finance

Invoice Finance enables a business to unlock the cash that is tied up in unpaid invoices. An agreement is reached between your funder and yourself on the percentage of cash that will be advanced against an unpaid invoice - usually up to 90 per cent of the value of the invoice can be advanced within 24 hours. The remainder comes to you once the invoice has been paid and fees have been taken. This removes the risk of unpaid bills from you, allowing you to make better decisions on investments that will help grow your business.

Bank Overdrafts and Business Credit Cards

An overdraft is generally considered best for short term financial need, perhaps to cover expenses, where you can withdraw more money than is in your actual account. But relying on an overdraft is not recommended if you’re seeking to expand and grow your business. Credit Cards can be used similarly to help finance expenses, but you need to consider the cost, they tend to come with higher interest rates.

Neither option is sustainable over the long term.

Asset-Based Lending

Asset Based Lending is a way of providing business finance by using your own assets as collateral. Assets could include inventory, equipment, receivables or property.

The lender evaluates assets such as inventory, accounts receivable, property, or industrial equipment to determine whether a business is eligible for finance. The loan a lender is prepared to offer will be driven by the perceived value of the asset. Many lenders will lend on the basis of the value of the asset because unlike an unsecured loan, the lender will get their money back in the form of your asset should you default. The negative side is that you lose a vital piece of machinery or a building if you default.

Asset Based Lending is a possible solution for businesses dealing with inconsistent cash flow, but it comes with a risk.

Supply Chain Finance

Supply Chain Finance is a payment strategy that enables suppliers to be paid earlier allowing them immediate access to working capital, while extending payment terms for business customers. It’s powered by a third-party intermediary and is designed to ease working capital pressures.

Choosing a Working Capital Funding Provider

Because no two businesses are identical, it’s important you select the best option for your business. Each option varies in terms of cost, flexibility and risk. What’s important is working with a financier who is an expert in your business sector and who understands the most common issues that arise when it comes to payments.

Since 2016, we have partnered with the SBCI and this partnership has allowed us to fund over €70m to over 300 Irish businesses. We are the only invoice finance provider partnered with SBCI, and access enables you to lower cost funding through the scheme.

To help you find the best solution for your business, our team of business funding experts are on hand to make sure you make the right decision. Contact us or call the team direct on (01) 506 0153.