Telling the truth about SME life today

Where to go for essential working capital

The first few years of any new enterprise can be quite fragile, even in the best of markets and this economy is anything but that! By and large your business won’t fail through lack of profit but rather lack of cash. It’s true to say that businesses can trade for quite some time without profit, but they will only run out of cash the once.

At the start, and throughout your business, life is a serious issue. There has never, at least in my life time, been such a severe shortage of willing high street lenders, unless you count the ones with the skull and cross bones flag outside the door of course!

The situation is no better in the private equity market, even assuming for one moment that they would be remotely interested in a start-up, which is hugely unlikely. They are not lending in any significant terms even to established companies. So, where do you get that essential working capital?

You may not find this particularly appealing, but start with releasing your excess cash in your own home. If you have any, funders are more likely to give you a mortgage than a business loan for one thing and for another, it can spread the cost over a longer period.

If you have any assets you don’t need, be it an extra car or an especially flash one, cash it in and use that to fund the business.

Speak to friends and family, they know you and are probably more amenable to supporting you, either as debt or even a share investment. It’s more likely they won’t want the security that a bank insists on. Having said that, make sure you have a proper agreement in place, handshake deals only work for Frankie Valli and the four seasons.

Depending on your business model, it may suit a factoring arrangement. This is where the factor (a specialist lender) advances payment against your raised invoices in advance of you receiving payment from the customer. For example, if your credit terms are 30 days, the factor will pay you on the day you raise the invoice for an agreed percentage. This acceleration of cash flow can be very helpful but it comes at a cost. This includes more than just the cost of the money, for example, interest and facilitation cost.

Consider talking to your suppliers about consignment stock or pay when paid. It’s not easy to negotiate but it’s always worth asking. Always negotiate on payment terms when you can.

Offer prompt payment discounts to all customers and watch your credit management like a hawk. Look for rebate opportunities from any and every supplier and ask your staff to come up with money saving ideas and reward them with something appropriate.

Invoice as quickly as possible, don’t wait until the end of the month and ensure you pursue slow payers immediately. Quickly define ‘won’t pay’ from ‘can’t pay’ as these need different management techniques.

Cash preservation is always important, especially in a start-up, so determine between the nice to have and the must have expenditure. Every single penny counts!

Peer to peer or crowd funding has also started to gain momentum, but many of these sites are only for established businesses but they are worth a look at.

Look to joint venture on costs. For instance, if you need to spend on marketing could you carry out a particular activity with an affiliated company? Finally, try bartering services for services/products. 

Be creative is the critical requirement. The banks are by and large closed for business as far as I can see.

Jo Haigh is a partner at fds Corporate Finance and Cracking Boards.

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