Facing a cash flow crunch? You’re not alone: research by Xero back in 2023 found that almost three-quarters (72%) of small businesses had experienced cash flow issues in the preceding 12 months.
These issues aren’t just “balance sheet discrepancies”, they found; they’re “deeply personal struggles” for business owners, having knock-on effects on their ability to pay both company bills and their own salary.
What’s driving these widespread cash flow issues, and how can businesses tackle them head-on through smart funding solutions?
Macroeconomic and structural factors drive cash flow issues
The cash flow challenges facing SMEs today are rooted in a mix of macroeconomic and structural factors, such as the ongoing impact of high inflation, elevated interest rates, and late customer payments.
FSB research, for example, shows that on average through 2022, quarter-on-quarter, 52% of SMEs in the UK suffered from late payments, meaning roughly 2.8 million small firms face this issue, with The Federation of Small Businesses going so far as to describe late payments as one of the biggest problems facing SMEs.
The government has even put together a “major support package” for SMEs aimed at tackling this scourge of late payments – including new legislation requiring all large businesses to include payment reporting in their annual reports and a consultation on “tough new laws” designed to hold larger firms to account.
Funding solutions for a cash flow crisis
Invoice finance
The issue of late payments appears to have reached an all-time high. Several headlines from recent months bear this out: see “Number of Welsh companies with overdue invoices hits 2024 high” and “Late payments increase by 48% with £348bn of debt outstanding”.
How invoice finance works: Invoice finance helps businesses alleviate the strain of late customer payments by unlocking cash tied up in outstanding invoices, often within 24 hours. Some providers, like Bibby Financial Services, can even release up to 100% of the invoice’s value.
Some of the top invoice finance providers:
-
- Kriya – User-friendly and streamlined processes
- Growth Lending – Best for international businesses
- Skipton Business Finance – Notable for interest-free finance offerings
- Metro Bank – Offers zero cancellation penalties
- Royal Bank of Scotland – Known for high customer support
- Bibby Financial Services – Unlocks 100% of invoice value
- Sonovate – Ideal for recruitment agencies
- Aldermore – Flexible funding options tailored to specific industries
- Close Brothers – Best suited for medium to large businesses
- NatWest – Specialises in invoice discounting for haulage and recruitment sectors
Revolving credit facilities (RCF)
For businesses looking to manage inconsistent cash flows and support sales expansion, a revolving credit facility may be an ideal solution. An RCF provides a set amount of capital that businesses can borrow and repay repeatedly, allowing for flexibility in funding purchases or making emergency payments.
Key features of RCF:
-
- Cyclical nature: Unlike traditional loans, RCFs allow borrowers to access funds as needed, repay them, and borrow again within the set credit limit.
-
- Cost-effective: If used wisely, an RCF can be cheaper than fixed-term loans. Lenders typically charge upfront fees, commitment fees, and drawdown margins based on what is actually borrowed.
Some of the top RCF providers in the UK:
-
- Reparo Finance – Flexible access to £25,000 – £75,000 annually
- iwoca – Offers up to £500,000 over 24 months
- FIBR – Provides credit lines between £10,000 and £250,000 with a drawdown fee of 4-17.5%
Merchant cash advances (MCA)
Merchant cash advances are increasingly popular among SMEs that rely heavily on credit card transactions and require quick access to cash. With an MCA, lenders offer an upfront sum based on projected future sales, which the business then repays through a percentage of daily or weekly credit and debit card transactions.
Pros and cons of MCA:
-
- Quick access: Ideal for retail or e-commerce businesses with strong credit card sales.
-
- High costs: However, caution is advised. MCAs can be expensive, with lenders multiplying the funding amount by a factor that can range from 1.09 to 1.50. This arrangement can be risky, particularly for businesses in vulnerable sectors like retail and hospitality.
- High costs: However, caution is advised. MCAs can be expensive, with lenders multiplying the funding amount by a factor that can range from 1.09 to 1.50. This arrangement can be risky, particularly for businesses in vulnerable sectors like retail and hospitality.
Some of the top MCA providers in the UK:
-
- 365 Finance
- YouLend
- SumUp
Asset-based lending (ABL)
Asset-based lending has gained traction recently, with a report indicating that nearly half (48%) of private equity General Partners view ABL as their second or third financing choice. ABL enables businesses with valuable assets to monetise them, unlocking working capital.
How ABL works:
-
- Formula-based model: The borrowing capacity is based on the value of pledged assets, allowing for larger credit facilities compared to traditional revolving credit.
-
- Flexibility: Unlike an RCF, which requires full repayment at certain intervals, ABL can be provided on a perpetual basis, allowing for fluctuations based on the availability of a company’s assets.
Ideal for seasonal or cyclical industries: ABL is particularly beneficial for businesses in sectors like retail, distribution, or manufacturing that may need more flexible loan structures with fewer financial covenants.
Some of the top ABL providers in the UK:
-
- Shawbrook
- White Oak UK
- Aldermore