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Bank Lending

Risky Business: Business Growth, Big Clients & Cashflow

By CreditMan Monday, January 20, 2014

The UK economy is back on track, with a 2.8% growth forecast for 2014. 500,000 new businesses were formed in the UK in the past year alone, and much of the UK’s small business network is now preparing and planning for growth.

When growth comes in the form of a new client though, it can be a risky affair. Winning a large project, with a big client, can be an incredibly exciting opportunity. Not only can it offer financial and growth benefits but it can give a portfolio credibility boost that can be used to generate further new business.

Yet with many bigger clients and contracts also comes a greater necessity for finance agreements, bigger purchases and more complex logistics processes – all of which can increase business costs… so cash is needed to keep things running smoothly. Unfortunately, many larger businesses use their scale to impose contractual and payment terms that small suppliers would not normally accept.

But it isn’t all doom and gloom. With most business growth comes risk, and a key skill is to take proactive and calculated steps to manage it. The opportunity and potential for rapid and diversified growth and expansion can make the risk worthwhile.

- Cashflow Risks -
In 2013, reported the biggest risks for small businesses as being availability of credit, fluctuating interest rates, bad debt, unpredictable spending patterns, and over-reliance on key customers.

By nature, smaller businesses do not enjoy the benefits of larger and more stable cashflow reserves and buffers, ready for times of purchasing and payment fluctuation to ride the wave of need.

The Government review of the Prompt Payment Code is currently underway, and could place more power in the hands of small businesses to charge interest and late payment fines on delayed payments. While helpful for many businesses, this may not be much use to companies agreeing to 90-day terms with their customers, but needing the cash in 30 days to pay their own invoices.

- Growth by Financing Receivables -
Late payments and long, unfavourable payment terms enforced by bigger clients can generate serious cashflow challenges, resulting in smaller businesses not being able to pay their own bills or staff on time.

For many growing companies, financing growth on the back of future receivables is an important strategy. For small or relatively new businesses though, traditional sources of receivables finance - typically the banks - may not be accessible, or may be too onerous, expensive and slow.

Since small businesses need room to think, plan, manoeuvre and grow, their finance facilities need to be as adaptable as they are. Invoice finance is an increasingly popular option among business owners looking to release cash from their unpaid invoices. Unlike more traditional forms of invoice finance, such as invoice discounting and factoring, invoice trading allows the ‘sale’ of one invoice at a time and doesn’t come with long-term agreements, restrictive covenants, and an expensive debenture. This process of selling invoices to investors raises working capital for growth and cashflow reserves to manage new costs associated with a big contract.

It is essential that businesses planning for growth and acquisition of bigger clients are aware of the many alternative finance products available to them – from beyond the banks. When the risks are high and business leaders need cash in the bank almost immediately, invoice finance is a key mitigation tool that can aid healthy operation and expansion of our valuable small business network.

About the author: Beth Nicholas is an approved writer for Platform Black – provider of complementary and alternative finance solutions including invoice finance, supply chain finance and channel finance.