Cash is the lifeblood of any business, but cash flow issues can impact even the best-run, most ambitious and successful companies.
According to JP Morgan Chase Institute research, the average business has only 27 cash buffer days in its operational runway. If cash stopped flowing in, then within a month, most companies would not be able to cover rent or make payroll.
Compounding the cash flow situation further is the economic conditions that are out of everyone’ control – namely the rise in inflation and interest rates. If things cost more, you have to spend more – but what if the money isn’t coming in on time either? And what if suppliers raise their rates for goods and services? How will that play out for businesses and for inflation?
It’s a precarious situation that many UK businesses are grappling with at the moment, with soaring inflation and the decision by The Bank of England (BOE) to increase interest rates to 4.5% – their highest level since 2008. Market expectations have it that this number will rise even further by the end of this year unless inflation goes down to 2%.
The government’s Energy Bills Discount Scheme aims to offer some relief to businesses by capping energy prices. But this is not enough to weather the storm. Not even the best economists in the world can predict how long this situation will last, as ongoing factors such as the war in Ukraine and the impact of Brexit continue.
So how can businesses mitigate the challenges of soaring interest rates and cash-flow issues?
Invoice financing
At a time when innovation is disrupting financial services to help consumers get better services, it makes sense for businesses to look at the plethora of fintech innovations that are focused on financial companies.
One of the big success stories to emerge from the fintech scene is Invoice Financing – this allows companies to borrow money against the amounts due from customers, helping them improve cash flow and continue operations without disruption. It essentially converts a company’s outstanding invoices due into immediate cash, enabling them to cover expenses or reinvest in its operations.
With 30% of invoices not being paid within the agreed terms – not to mention one in five insolvencies being attributed to late payments, it can be a game-changer for many businesses. This is especially true with the rise in interest rates – as in times like these, the attractiveness of invoice financing only increases.
Unlike traditional bank loans, the cost of invoice financing does not directly correlate with BOE interest rates. This means it can potentially offer a cheaper and more predictable form of borrowing. This can be a lifesaver for businesses operating on thin margins or those with significant amounts tied up in unpaid invoices.
The approval process for invoice financing is also much faster and less stringent than traditional loans, making it an attractive option for businesses that may not have extensive credit histories. It also provides businesses with more control over their financial management, as they can choose which invoices to finance and when.
Incentivising payments
Other ways that businesses can protect their cash flow is to offer ways to incentivise on time – payments – such as offering discounts. Alternative methods include changing how a company pursues unpaid invoices and the payment channels it will accept. Email and digital channels tend to be more effective than phone calls as employees continue to work from home. Subscription models can also lead to more reliable payment.
Sign contracts with suppliers
Businesses should have contracts in place to fix supply prices, so they are protected from the economic challenges caused by rising interest rates and inflations. If prices increase, or payment terms and accounts payable change, partners could feel the pinch and want to pass increasing costs to manufacturing, distribution, and business services, to their business supply chains. A fixed priced contract can mitigate that threat.
Silver lining – opportunities for growth
All in all, while the BOE’s increase in interest rates presents significant challenges for businesses, it also opens opportunities to explore innovative financial solutions like invoice financing.
The model works particularly effectively for fast growing businesses that might be providing services for industry giants or larger companies with complicated organisational structures and approval processes. Companies that take advantage of the freedom and flexibility of invoice financing do not just use the funds to survive but can also thrive and scale, as they can simultaneously access credit or traditional forms of investment for further growth.
As more companies are paying attention to how they address the cash flow issues arising from late payments, they are also examining the broader context and addressing how to fund future goals around hiring, technological investment and expansion. This is where invoice financing can go beyond a short-term solution and be a critical factor in long-term growth.
Times are tough for many of us but for every company that fails, there is another one that survives and thrives during a bear market. As we navigate this new economic landscape, businesses that are adaptable, flexible, and open to change will be best positioned to weather the storm and emerge stronger on the other side.