4 ways to boost your company’s cash flow

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So you’re the founder of an SME with an excellent business model. Your business is thriving, your customer base keeps growing, and you’ve expanded your team to capitalize on the momentum you’ve had. With so much going for you, what could possibly trip you up?

The answer is simple, but often overlooked. In the same way that a teenager will require larger meals than a preschooler to meet their bodies’ needs, a business will also need bigger cash flow when it’s getting more orders or considering expansion.

In other words, business growth, while exciting, is inevitably accompanied by an increase in baseline costs. In a 2017 poll by the DP Information Group, up to 35 percent of 2,522 SMEs surveyed said that they had faced financing-related issues at some point.

The most common problem is delayed payments from customers, with eight out of 10 SMEs citing this as the reason for their cash flow shortage. Other common obstacles include tightening credit access, problems with renewing financing, and higher interest rates for bank loans.

While there’s no substitute for a savvy, well-organized cash management system, knowing how to obtain cash in a pinch can help companies stay afloat. Here are some tips.

1. Offer early payment discounts

Photo credit: Artem Bali

Most businesses run into cash flow problems because of customers who don’t pay on time.

To address this, the first obvious thing to do is persuade customers to pay for products or services quicker. This can be done by offering incentives such as discounts for those who pay earlier than the due date.

For instance, if an existing arrangement offers a credit term of 90 days, businesses can opt to offer customers a 15 percent early-payment discount in exchange for paying within the first month. It’s a win-win situation – the company gets paid and the customer enjoys lower capital cost.

Businesses can also adopt a dynamic discounting system, which works similarly to early-payment discounts, but provides more flexibility. It involves a range of discounts that customers can pick from, depending on how quickly they can pay. The earlier they can settle their obligations, the greater the discount.

2. Opt for invoice financing

Another way to work around the problem of late payments is invoice financing.

Simply put, this type of financing involves the company selling its customer invoices to a third party. In exchange, the third party advances a sum of capital to the company – often up to around 85 percent of the invoice value. The third party then gets the full invoice amount once customers pay up, with the 15 percent accounting for finance fees.

This provides an immediate cash flow boost when needed most, as some invoice financing companies offer cash within three days from the application.

The downside, however, is that companies need to have significant invoice amounts to generate enough cash in the first place.

3. Take out a working capital loan

If cash flow problems are recurrent, companies might want to look for solutions that help in the longer term. Among them is taking out a working capital loan.

A working capital loan deals with larger sums of money. Depending on the institution businesses apply to, loans may amount anywhere between US$220,000 and US$366,000.

But working capital loans often require an approval timeframe of up to four weeks, and it’s a hassle to put the required documentation together. Transaction fees and annual percentage rates may also reach as high as 3.5 to six percent per annum.

4. Get a business credit card

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A business credit card works like a personal credit card, allowing businesses to pay suppliers or even fund expansion efforts on an ad hoc basis. It’s a simple way for business owners to consolidate their spending because their expenses are collated in monthly statements.

Business credit limits are also kept separate from personal credit card limits.

Additionally, with business credit cards, companies don’t need to go through the hassle of putting together a stack of documents that loans require. The cards also offer standby credit, enabling companies to avoid the lengthy approval process for raising spending limits.

However, this solution comes with its own disadvantages. Using a business credit card can be more expensive compared to loans, due to higher interest rates and accompanying fees.

For greater savings, businesses can opt for cards that waive annual fees and provide longer repayment periods. They should, however, take a close look at the fine print about interest rates, rewards, and repayment options that carry additional interest.

UOB’s new Business Plus Card is made for SMEs looking for an additional credit line, with a low monthly interest rate of 1.15 percent (13.8 percent per annum). For more information, check out UOB’s website.