What short-term working capital options can my business access?
I run a 20-person wholesaling business and my largest customer has financial problems. They are seeking a company voluntary arrangement, which will wipe out its unpaid debt with the remainder paid back over three years. It’s not critical yet, but I could do with some short-term working capital solutions to get me through the next six months. What are my options?
A. Martyn Freshwater of Lloyds TSB writes:
There are many options available when looking for a short-term cash injection to fund growth plans, such as payroll finance, leasing and invoice discounting. Each of these has its merits for certain businesses, but you need to think carefully about what it is you really need to achieve before making any commitments. I think your best bet is invoice finance, as, put simply, you’ll be releasing the value tied up in your firm’s sales ledger – for invoices you are still waiting to be paid – and you can use the money to fund your growth plans. On top of this, you might want to think about arranging a separate ‘debtor protection’ facility, which would help guard against another of your customers going out of business.
The huge benefit of ‘asset-backed’ lending like this is that, as your business grows, the funding arrangements you have in place can be tailored to meet your changing needs. It’s worth checking that your bank is able to provide such facilities. However, remember that not all asset-backed lending is equal. Some providers will be much more rigid than others and you should make sure that yours is willing to be flexible. Any providers worth their salt will make checks based on the business’ trading history and will make a lending decision, based on the confidence they have in your ability to drive growth. As a result, they will be able to stretch their fund to suit your needs. As with anything in business, it’s worth taking the time to consider all your options, read the small print and build up a relationship with a provider who you believe can give you funding that matches both the scale and pace of your expansion.
Read more about working capital management in the Growing Business blog