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Do you really need to borrow?

Posted by Keir Cox on Oct 23, 2018 9:12:20 AM

Every business needs capital to grow and a good regular cashflow is the life blood of all enterprises. Achieving that can often be more difficult and too often businesses are simply financing a bad debt hole.

Most people accept that in order to start a business it will require investment in a number of forms; money, time, energy and probably a fair degree of hope. Those funds may be readily available from external sources like banks, peer to peer lenders, friends, family, grants, even credit cards. So often the drive and vision for the new enterprise overshadows the actual monetary return on the investment and the negative impact of cashflow is felt. 

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Many businesses look to borrow money to assist their cashflow, but experience has shown that for many better credit controls would significantly reduce the need to do so:

  • Do you have good credit control systems in place with clear payment terms and do you follow up slow payers?

  • Do you agree payment terms you can manage with your customers and ensure invoices are raised promptly once your product or service has been delivered?

  • Do you have clear contract terms at the start of each transaction and follow up those customers when payment is due?

  • And finally, and probably more crucially, if payment is not received are you prepared to take the legal action you may have already advised you would do?

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The payment cycle can generally be shortened in most businesses by removing some of the non-value-added activities. If you can shorten the time it takes to process information and orders through the business. The quicker the business can deliver high quality services and products to the customer, the quicker it can invoice and be paid.

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It cannot be said often enough that a good customer is one who pays their invoice on time and then re-orders. Bad payers are just a drain on your business and you would generally be better off without them. 

Cashflow is also impacted by purchases. Not only is it important to buy wisely and make the most of modern purchasing techniques to ensure that your business is getting true value for money. 

What if that exciting opportunity for new business arises but it will require substantial investment in new staffing or equipment or require working capital to finance acquisition? Having a tightly run ship will assist greatly in delivering finance at the terms and rates that are amongst the best in the market and ultimately will cost less to service.

You’ll still be taking additional risks and, certainly, post-recession you’ll be unlikely to be provided funding without a personal guarantee from all the directors.

If your personal assets are jointly owned, you’ll find that lenders will insist on your spouse receiving independent legal advice which will simply advise that the family home will be significantly at risk.

At this stage you may want to consider the benefits of Personal Guarantee Insurance:

Designed to share some of the onerous responsibilities if your business ultimately becomes insolvent and cannot repay the loan. The journey starts much earlier and provides the policyholder with proactive advice on any difficulties encountered on their journey. Advice on cash flow, bad debts, regulatory disputes, HR issues and refinancing to name just a few of the areas we cover most. 

Whilst we’d like to think we’ve got a wealth of experience behind us, the reality is that we see new issues arise every day and we work hand in hand with our policyholders to avoid any major impact. If we can’t then at least we have the knowledge that the insurance is in place to protect the family home and other hard-earned assets.

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Topics: #personalguarantee, #Directors, #SMEs

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