Many believe banks and Big Business wield too much power. And who can argue? After all, banks set the lending agenda – whether to lend, how much to lend, and on what terms. As for Big Business, it operates on a cash-neutral basis – it pays its suppliers only when it has been paid itself. Big Business ties up money in the supply chain by using (and abusing) its suppliers as a source of interest-free credit.

It’s worth remembering that a sale does not equal a profit. In fact, perversely every sale you make is a potential loss if you pay your suppliers’ invoices but your own invoices remain unpaid. Until your invoices are paid you are simply giving interest-free credit to your customers.

UK SMEs Are Owed £255bn in Late Payments

This is a big problem. A £255 billion problem – that’s the estimate of how much money is tied up in late SME payments in the UK. How can small businesses grow to their full potential when they have to grapple with a problem like this? Without SMEs there would be no Big Business. SMEs define the economy: when SMEs do well the economy does well.

Changes in Bank Lending

So how do you free-up this cash-flow blockage? Traditionally you would have gone to your bank for an overdraft or loan that would cover you while you waited to be paid. But right now banks don’t like lending for working capital purposes – despite efforts by the government to get them to do just that – so you’re left with invoice discounting and factoring as your only bank alternatives.

Risks with Invoice Factoring and Discounting

With factoring you sell your invoices to the factoring provider – the factor. The factor now owns the invoices and will attempt to collect payment. Your customers may take umbrage at this: they want to deal with you; they now wonder if you trust them; they may also wonder if you’re in trouble. And you can’t get round this by using factoring on an invoice-by-invoice basis, you have to factor your entire invoice book.

So you ditch the idea of factoring, which leaves you with invoice discounting. At least you can do invoice discounting on the quiet because you stay in control of your invoices; with invoice discounting you are simply borrowing against your unpaid invoices, for a charge. Well a variety of charges, as many as 35 different charges. But however you dress it up, invoice discounting is debt, and debt means risk.

Increasing Risk Devalues Your Business

When you build risk into your business you devalue it, and banks aren’t very good at assessing risk. So debt comes with covenants and many of them are personal to you, not the business. The fact your business is borrowing against unpaid invoices is a problem in itself; an invoice isn’t really worth anything until it’s paid. So the bank gets worried about this; it also knows that your liability as a director of a limited company is limited to the value of your shares. So how does it limit its exposure? By asking you to personally guarantee the debt.

When you personally guarantee a debt you are saying that should your business be unable to repay the debt, you’ll repay it personally out of your own assets. And if you don’t? The bank will just make you bankrupt and take your house; this doesn’t just damage you, it damages your family too.

Is it any wonder some small-business owners resist the temptation to grow because of a fear of debt?

Wouldn’t it be great if SMEs like you could fuel your business with cash not debt, trading on cash, with no personal guarantees, no charge on your business, and without you giving credit to your customers? Wouldn’t it also be good if you could negotiate better deals from your suppliers by paying cash yet still enjoy the payment terms you’re used to?

What you need is a better way to pay and a better way to get paid.


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Ian Fitz-Harris

Ian is a businessman and chartered accountant who built Euro Sales Finance into a market leading European commercial finance business that was the first fund raising on the AiM, listed on the LSE, and was sold to a global banking group. Ian is also a Managing Director of URICA UK.