Alternative solutions to seasonal cash flow problems

Alex Fenton, CEO and founder of alternative finance provider, GapCap, addresses how small businesses can avoid post-Christmas cashflow disasters.

For small businesses, after the time of good cheer comes a time which can often be one of crisis.

Big businesses are notorious for paying invoices late to the detriment of their smaller suppliers. In 2015, invoices were paid an average of 22.5 days beyond agreed terms.[1] Recent research from Bacs shows that whilst total ‘late payment debt’ is now over £31 billion, SMEs hold £26.8 billon of the burden.[2]

The issue of late payment is constant throughout the year but the issue is exacerbated at Christmas: research shows that small businesses supplying larger retailers – such as Tesco or Sainsbury – for the 25th December, won’t see their cash until 6th March.

The result is that small suppliers are unable to prepare product for the year’s other greatest consumer spikes – Valentine’s Day and Easter. Many businesses find it difficult to purchase inventory or hire seasonal personnel, whilst 48% of businesses are forced to pay their suppliers late. Indeed and 10% are forced to turn down new business.[3]

So, what can small suppliers do to get through seasonal spikes in product demand when invoices are regularly paid late?

Seek alternative finance

Faced with cashflow difficulties following Christmas, 30% of business will increase borrowing.[4] But getting a bank loan around seasonal peak times is not easy, as banks usually require a steady monthly income, regardless of circumstances. In addition, nearly three in five businesses have gone so far as to suspend work and services to combat late payment, whilst others depend heavily on bank overdrafts, using it to pay bills and buy materials in time for seasonal peaks.[5] In answer to struggling seasonal finances, these traditional solutions can keep a business to ticking over. But they will not help a business grow.

However, businesses can turn to alternative finance solutions: selective invoice finance allows businesses to raise cash against their invoices in 24 hours without any of the drawbacks of a traditional invoice facility, be it regularly or just as a one-off. In this way, smaller suppliers can release cash when there is a shortfall in cashflow, enabling them to prepare for future seasonal spikes.

Plan ahead

Forward planning is also vital for avoiding post-Christmas cashflow disasters. No matter how small the business, a business plan is essential to protect the bottom line during quieter times. It is recommended that businesses operate a 13-week rolling cashflow projection, predicting where possible areas of stress may lie. This exercise should be undertaken at least once a week, taking into account real revenue figures once they’re apparent.

New Year, New You

Rather than running for the hills when big businesses start putting in their excuses for late payment, rest easy knowing that using a new solution such as select invoice financing can provide access to cash in arrears in a matter of days.

Late payment debt can make it extremely difficult for businesses to plan for the year ahead. But alternative solutions such a select invoice financing on-side, smaller companies can easily budget and plan ahead.

No rest for the wicked

Finally, once the seasonal peak is past, activity must not stagnate. Business may no longer be quite as booming but quiet times are an opportunity to catch up on neglected planning and admin.

Consider areas of diversification, where product or service improvements could be made, and staff training. Finally, don’t let marketing skills slide – during times of seasonal rush, small businesses can forget the importance of marketing; in times of lull, drumming up new business and raising brand awareness should be top of the list.

In seeking alternatives to traditional means of overcoming post-Christmas late payment debt, small businesses can keep things moving between Christmas, Valentine’s and Easter and, when the big orders start rolling in, will be able to respond with the appropriate seasonal gusto.