Business and Xero accountants and advisors

Think your business needs finance? Think again

2 May 2022

When cash is tight, seeking business finance may seems like the logical first step. However finance involves additional costs and risks, so we recommend you consider alternatives before you commit.

Why do you need business finance?

It’s important to understand what the money is for. Is it for:

  • working capital (the money you need to run the day to day business, so spending on stock, materials, wages, transport, less the money you get in from sales whether cash or credit)
  • investing in new equipment or infrastructure
  • paying for research and development of new products or services
  • covering a downturn in business or project / supply chain delays?

Business finance comes at a cost and at risk.

Firstly, interest rates and repayment terms will vary depending on the product you choose and the perceived risk of your failure. Secondly, security is often required with Shareholder / Directors asked to provide personal guarantees to their lender. That means that if the business is unable to repay the debt, your personal assets may be at risk. Thirdly, we are seeing the cost of borrowing increase as the Bank of England attempts to control rapidly rising inflation.

Many businesses have already taken on additional finance during the covid-19 pandemic. Provided owners feel confident that they a sustainable business over the long term, that makes sense, particularly when the loans were guaranteed by government (rather than personally Shareholder / Directors).

Why might you not need business finance?

One business told us that they believed their company needed a £50,000 loan to support their operations. However we suspected that wasn’t the case, so when we investigated we found:

  • they were giving (unnecessary) credit to individuals
  • they had high (unbilled) Work in Progress and debtors
  • their rates had fallen behind market conditions

Within six months of changing their operating processes, they had released £50,000 of cash into their business and had increased profits. And just as important, they no longer required a business loan.

What should I check?

Check that your business is:

  • getting paid on time
  • not giving unnecessary credit to potential bad/non payers
  • not providing extended credit terms
  • paying suppliers on time (rather than unnecessarily early)*
  • raising all invoices timely
  • making it easy for customers to pay online
  • collecting regular payments (e.g. service contracts) by direct debit
  • making the most of all your space / stock / equipment / assets (they should be ‘earning’ as much and as quickly as possible)
  • not paying for software, products, assets or services that you don’t need
  • planning to avoid unexpected use of overtime / subcontractors
  • making the most of opportunities to secure repeat business and to up-sell to existing customers.

If you’re unsure what’s normal in your sector,  we can help you compare to benchmark figures.

* Sometimes people pay bills on receipt (rather than when due) because they worry about forgetting them. We can help you find a system that avoids this problem.

What next?

If cash is tight in your business, let us know. For a fixed low fee we can carry out a Business & Xero Review to help you identify problem areas, and opportunities to improve your cashflow.

Book your Business & Xero Review

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About the Author

Graham Potts


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