Mind your cashflow: how to avoid the SME pitfall

Taking your eye off the ball when it comes to cash-flow can cause problems even in a thriving business. If mistakes are made and cash flow dries up, a fledgling enterprise can – and often will – sink very quickly.

Despite government interventions such as Funding for Lending, obtaining finance remains the number one issue facing small businesses. The latest data from the Bank of England shows that net business lending fell by £500 million in the last quarter for which figures are available. That's particularly bad news for SMEs.

Many new companies employ only a few people, with the founder taking on roles that would be split between several people at a larger company. That can mean financial planning is overlooked, or carried out without due rigour or expertise.

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According to Andrew Subramaniam, SME partner at the chartered accountants HW Fisher & Company: "All the happy clients and efficient staff in the world won't help if your cash management is poor. Failure to pay overheads on time, be they rent or salaries, can very quickly prove terminal."

Running out of cash to fund day-to-day needs is a risk for all small businesses, particularly those that experience rapid success and expand quickly. Glenn Collins of the Association of Chartered Certified Accountants says: "As a business grows it requires more cash to fund working capital. This all needs to be financed and a business that grows too quickly without having its finances in order will run out of cash." The solution is to take a step back, plan and evaluate financial needs in advance and make arrangements well before funds are needed.

If you have been turned down by your bank, then cast your net wider: there are plenty of other options. The government is considering forcing banks to refer small businesses that they reject to alternative funding providers, but until that happens consider seeing a broker. The National Association of Commercial Brokers runs findSMEfinance.co.uk, which enables small businesses to access scores of lenders, including challenger banks and peer to peer specialists.

Adam Tyler, the chief executive, says: "Many businesses are completely unaware of the breadth of lenders that are out there, and often limit themselves to high street banks. A recent survey of our members estimated that only 6 per cent of SMEs are aware of the full range of lenders The right finance is out there. It's a matter of knowing how to access it."

Another way to raise cash is to sell shares in your business. Whether you choose an angel investor or a crowd of smaller backers, releasing equity allows you to get a cash injection without the burden of monthly repayments. However, there are often strings attached and you need to look carefully before you leap.

Goncalo de Vasconcelos, founder of the SyndicateRoom equity crowd-funding site, says: "It means accepting the input and scrutiny of your investors, and the expectation that you will eventually pay them back their investment many times over. It's a long-term partnership, a bit like a marriage, so you should beware racing down the aisle with the first offer that comes along."

As a general rule, the sooner you take on investors the more likely it is that you will have to give away a larger amount of the business, so holding off can be sensible if you are able to find alternative funding.

"By delaying investment for even a year, and instead securing finance from alternative sources, the business will hopefully have grown and be even more attractive to investors," Noman Akram, managing director of the peer-to-peer lender fundingsecure, says. "As a result you'll be able to negotiate much better terms and give away a smaller stake."

Securing investment at the right time can make the difference between growth and stagnation, and you shouldn't be afraid to part with some equity to do it. "Weigh up every proposal carefully, both in terms of its valuation of your company and the investor's expectations," Gasco says. "Sell too much equity in haste now and you will repent at leisure later. But don't sell any and you may be left on the shelf, watching wistfully as your competitors overtake you."