For businesses feeling the pressure, having a poor or not yet established cash flow can be a major concern. Estimates suggest that as many as 82% of small businesses that fail do so as a result of cash flow difficulties – so it’s important to be ready and have a plan in place.
Cash flow problems can be unpredictable and arise swiftly, making it hard to completely prepare for them. Fortunately, bridging finance can enable businesses to quickly raise short-term funds until their cash flow improves.
Why do cash flow issues arise?
‘Cash flow problems’ is something of a catch-all term covering any number of circumstances that involve not enough money coming in or too much money going out. In many cases, it can simply be that you haven’t got the money yet and so you need something to tide you over until your income arrives. Common cash flow issue causes include:
- High initial expenditure, e.g. on property, refurbishments, equipment or product stock
- Clients and customers not paying invoices on time
- Seasonal lulls in trade
- Unexpected tax bills.
As inconvenient as it may be, there are still bills to be paid even when your income streams aren’t at their highest. Things like wages, rent, business rates, energy bills and supplier invoices need to be settled – and if payments are late, this could affect the credit rating of your business and make it harder for you to get loans in the future.
Fixing low cash flow
The best way to fix your cash flow problems in the long term will depend on what caused them. Measures might include:
- Chasing up invoices
- Incentives for early payments
- Reductions and sale prices on products
- Taking deposits before performing services.
Whatever way you choose to address your business’s cash flow issues, remember that it’s not likely to be a quick fix. In most cases, these situations take a while to resolve – meaning you could be waiting a while before your income increases enough to cover what you owe.
So, what can you do in the meantime?
Using bridging finance
Although many people associate bridging finance with broken chain homes and property developers, the reality is that a bridging loan can be used for pretty much anything so long as you can demonstrate a plan for making repayments to your lender. That means you can use a bridging loan to cover your outgoings in the short term while you work on your cash flow problems in the background.
When you apply for a bridging loan, the most important part of the application process involves you explaining to the lender how you are going to raise funds to repay the loan. This means outlining what measures you’ll take to improve cash flow and including reasonable estimates of how much capital this will raise for you. If you apply for a bridging loan without a solid plan in place, you will most likely be denied the funds.
You’ll also need to provide an asset as security for the loan – a valuable asset which the lender will claim as compensation if you fail to repay your loan. In most cases, people use property as security, but other assets can also be considered. As a business, you can offer up something that belongs to the business, such as your commercial premises, or something that you personally own, such as your home.
It’s important to remember that a bridging loan is not free, so you’ll be charged interest on the loan amount until you’ve fully paid it off. Because bridging loans are fast and offer large sums, interest on these loans is usually at a much higher rate than other loans like mortgages – this is because lenders see them as more risky.
However, the interest is only charged from the beginning of the loan to the time you pay it off – not until the scheduled end of the loan term. This means that paying the funds back quicker will save you money in interest payments and can make the deal more cost-effective for you – another incentive to have your fundraising strategy thought out well before you apply for a loan.
Bridging loans are designed to be short term, so they may not be the best option for you if you think it’s going to take years or longer for your funds to become available. But the actual length of the loan term is generally customisable – it can be anything from a few weeks to 18 months.
So, is it worth it?
Well, a bridging loan is by no means a full solution to your cash flow problems – and you shouldn’t treat it as such. It’s still vitally important that you adjust your income or expenditure so your business is operating within its means, otherwise you risk landing yourself in bigger problems financially.
However, if you’re prepared to put the work in, improve your business’s cash flow and have a plan to pay off your loan on time, bridging finance can be an excellent way to give you short-term relief from financial pressures. In extreme cases, it can even save your business from liquidation.
Think a bridging loan might be able to help you? Get in touch with our bridging finance team. We’ll help you understand whether a bridging loan is the right choice, support your application and ensure you understand all the ins and outs of your payback terms and conditions.
