How Does Factoring Affect Cashflow and Cash Management?

Life is tough for small businesses in the UK. The current financial climate means that small businesses are struggling more than ever before to access enough finances to help their businesses grow and flourish. It is especially frustrating for businesses who are doing well, who are creating work and who do have the capacity to grow but have to turn away work just because they cannot afford to offer suitable credit terms. Unfortunately, in the current business climate, many large businesses are happy to work with small and medium enterprises but only on their terms, which means they may have to wait 30, 60 or even 90 days for payment. This can place and untenable strain on a small business’s finances and stunt their growth and even put them out of business if their cash flow problems get so bad.

Cash Flow Problems Are Created By Slow Payments

Customers who pay quickly are a blessing for small companies. However, when their customers are on longer terms, it means that unless careful cash management is in place, small companies can risk not being able to replenish stock, buy or repair equipment or even meet their payroll liabilities. Small companies can often be placed in serious dilemmas when they land a large sale that requires longer terms.

  • Do they take the sale and risk working capital issues?
  • Do they turn away the sale and risk losing future business?

It’s a fundamental problem for a lot of small businesses but there are three options available:

1. Turn away the sale and avoid growing

This is perhaps the most conservative option and whilst it will prevent your business having cash flow problems, is it really healthy for a business to turn away big sales and to avoid growth? Do you think they’ll ever bother coming back to you if you’ve turned them away once?

2. Ask the clients to pay quicker

If the client wants to pay on 60 day terms but it would be much more advantageous to your cashflow to have them on 30 days, then you can always ask. But what is the likelihood of them agreeing? And would such a question lead them to question the financial health of your business? A risky strategy and one that in many situations is unlikely to succeed.

3. Use factoring to ease your cashflow struggles

Factoring is used by businesses across the UK to ease their cash flow worries and it is perfect for the situations illustrated above. It’s great for small businesses and especially for those that may not have access to credit through more traditional means such as banks. This is because unlike a bank loan which requires a stringent credit check on your business, with factoring it is the strength and spread of your customers that is of primary importance.

Being able to access a large percentage of your customer’s invoice immediately means that no longer do you have to turn away large orders and you are free to grow your business.

If you would like to know more about how factoring can help your business then call us on 01827 707680 for a free, no obligation chat.

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