Banks Slashing SME Overdrafts by 5M GBP a Day - How to Respond

It's almost a cliché to say it but cash flow truly is the life blood of business. Ask any business owner and they will attest to the fact.

The manner in which a company keeps its cash flowing varies widely.

Over the years one of the most popular methods has been to set up an overdraft facility through your bank.

Many SMEs have come to depend on such a setup to tide them over until their clients pay.

However, with the banks cutting an estimated £5 million overdrafts a day, the impact on British SMEs is apparent and can cause serious problems if an alternative means of bridging the cash flow gap is not found. To put this issue in perspective, a recent survey of 250 businesses found that almost a fifth (17%) had had their overdrafts removed altogether, while a total of 30 percent have seen reductions imposed on their overdrafts over the past two years.

But just what are your options? Looking long term, the most obvious solution is to acquire more clients to increase your income.

However, with immediate expenses such as payroll and utilities, this isn’t really viable in the short to medium term. Indeed, taking on new customers can often initially increase your outgoings as you may need to take on more staff, purchase materials, and so forth.

A more realistic option may be to change your credit terms and take a more aggressive approach to credit management. Shortening the grace period offered to clients, means your invoices should be paid more promptly - and that translates into quicker access to cash. Equally, chasing past due invoices for payment can help shore the gap in your working capital.

Once again however, considerations must be made. Changing your terms of credit requires negotiating with your clients. Some clients, especially bigger organisations, might not agree to the changes and may threaten to take their business elsewhere. Clearly, customer relations is crucial if this is the route you choose to take.

A third option, which is becoming increasingly popular across the UK, is spot factoring. Here you sell your invoices to a company such as The Interface Financial Group at a slight discount.

The benefit of this is that you don’t have to wait until the invoice is due to access the capital owed to you - meaning you can get the money working for you straight away. This is especially attractive to businesses that must wait 60 to 90 days for payment.

As with the other options listed above, some considerations must be made such as will the customer, whose invoice you’re selling, pay on time. However, these are questions that should be easily answered when the invoice discounter conducts their due diligence.

One thing is for sure, the banks are continuing to cut their level of risk and there is no sign of the pressure on SMEs easing anytime soon.

With that in mind, business owners would be wise to start making alternative arrangements to bolster their cash flow now, before the banks cut their debt facilities.