Is your cash flow at risk? 5 ways to protect it

19/02/2020

The recent surge in corporate insolvencies should be a powerful reminder for businesses of all shapes and sizes to protect their cash flow.

Just because your cash flow is currently healthy, that doesn’t mean you shouldn’t be aware of the potential risks it may face and the steps you can take to protect it.

Even with effective forecasting and management strategies in place, it doesn’t take long for late payments and bad debts to cause serious cash flow problems.

With the failure of one business causing a domino effect on others in its supply chain, the risk of bad debt and the impact that can have on any business’s cash flow is something business owners simply can’t afford to ignore.

Fortunately, there are various ways that you can protect your cash flow from bad debt and reduce the risks of experiencing this knock-on effect.

Here, we look at five of your options.

1. Get to know your customers

In your personal life you wouldn’t loan large sums of a money to a stranger without getting to know them first, so why do so many people do it in business?

With the UK’s current late payment culture and increased threat of insolvency, it’s more important than ever to know your customers before offering credit terms.

This can be achieved through performing credit checks which provide valuable insight into the financial status and creditworthiness of your customers.

This is of course important for new customers, but don’t forget about your existing customers too. Circumstances can change at any time which could put your cash flow at risk.

2. Consider your funding options

When you’re trying to mitigate the effects of a cash flow challenge the most important thing is to get ahead of the problem early and be prepared to act. Although something may seem like a minor issue, it doesn’t take long for several problems to snowball and leave you with a much greater financial strain.

Whether you are currently experiencing cash flow issues or not, understanding your options regarding funding means that you can respond quickly and make an informed decision if the need arises.

Below are 5 key funding options that are worth considering.

1. Invoice Factoring

Invoice factoring allows you to release up to 90% of the value of an invoice within 24 hours of its issue. This option offers flexibility as it grows in line with your sales ledger and can also offer you credit protection.

One in 10 invoices owed to SMEs are paid late, and these businesses spend an average of 15 days a year chasing payment on outstanding invoices.

Invoice factoring is a great way to bridge the gap that can be caused by trading on credit terms and additionally allows you to reduce in-house overheads and improve collection times, with the use of the lender’s dedicated sales ledger management service.

You can download the full diagram of how invoice factoring works here.

2. Spot Factoring

Like invoice factoring, spot factoring (or single invoice factoring) can allow you to release up to 90% of an invoices value in 24 hours of its issue. However, instead of providing funding against your whole sales ledger, spot factoring allows you to release cash from individual invoices.

This allows you fast access to the cash tied up in unpaid invoices without tying you into a long-term funding facility. It’s a particularly good option for high value invoices or those with long payment terms and can suit new businesses or those without a strong credit history, as funding decisions are based on your customer’s creditworthiness.

Read our guide to spot factoring here for more information

3. Asset Finance

If you are looking for funding to secure new equipment or machinery, or currently have a lot of money tied up in equipment and machinery, you may find that asset finance is a good fit for you.

Options when you’re looking to buy new equipment include hire purchase and finance leases. A hire purchase agreement involves the hire purchase company buying the asset you require and leasing it back to you for regular payments, with the option for you to buy the asset at the end of the lease.

Similarly, a finance lease involves the company buying the asset and leasing it back to you, but at the end of the contract the company will sell the asset, and you may benefit from a share of the proceeds.

If you already have money tied up in assets, you may want to consider asset refinancing. This involves selling your assets to a finance provider and then leasing it back from them in return for fixed payments.

All these options can help you manage your cash flow with fixed monthly payments and can also protect your company from asset depreciation.

4. Loans

Although there are many other options, business loans are still a great way to raise working capital or fund growth and should form part of your considerations.

Loans provide quick access to money that can be used for any business purpose and can be a good option if your business has no fundable assets. It’s also possible to get fixed interest rates so that you will know the exact value of repayments throughout the loan period.

Download our ultimate guide to business loans

5. Peer-to-Peer lending

An increasingly popular alternative to traditional bank lending, peer-to-peer lending allows businesses to borrow money from private investors.

Before you can secure this type of funding, you must have a good credit score and typically at least two years trading history, as this lessens the risk to potential investors. You will also have to be clear on the purpose of the funding and how it will be spent.

However, if you meet these criteria, peer-to-peer funding is typically easier and faster to secure than traditional bank loans and comes with more competitive interest rates, as investors will bid against each other to win your custom.

Take a look at the benefits of peer-to-peer lending

3. Seek specialist support

Statistically, the longer an invoice goes overdue the harder it will be to collect payment in full and, with the added risk of debtor insolvency, it’s more important than ever to get what you’re owed as soon as possible.

If your internal efforts are failing to get right results, it could be beneficial to pass your overdue debts on to a debt collection agency.

They will use their extensive expertise to get the results you need whilst you regain the time to focus on the rest of your sales ledger.

Read how we can help you to get paid faster.

4. Secure credit insurance

You likely have public liability insurance, vehicle insurance and buildings and contents insurance to protect your business. But do you have credit insurance to safeguard your cash flow?

Credit insurance – or debtor protection – protects a business’s cash flow from the threat of bad debts, whether due to insolvency or protracted default (non-payment within six months).

With various different options available, credit insurance solutions can be tailored to your needs. Protection can be provided against your entire debtor book, key customers or just single debtors that may have an adverse credit history or have placed an order of a particularly high value.

Similarly, companies which trade with overseas customers could consider international cover. Whilst available as a standalone product, it can often be bolted on to other funding products such as invoice finance.

Utilising a credit insurance facility could also help you to negotiate favourable terms with suppliers as policies will reduce the impact of a bad debt on them too.

5. Talk to a finance broker

If you’re wondering whether credit insurance or a non-recourse invoice finance facility would be right for your business, or you’re looking for additional cash flow support, an independent finance broker can help you to identify the right way forward.

With more than 20 years’ experience, we’ll listen to your challenges and requirements before using our expertise of the finance market to find the facility that will work for you in the short, medium and long term.

If you need help protecting your cash flow from bad debt contact our team on 0800 9774833 to see how we can help. Or request a call back below and we’ll be in touch at a convenient time.