As lockdown restrictions ease and businesses reopen and ramp up activity, maintaining healthy cash flow is going to be crucial for many SMEs, particularly those in the hospitality and retail sectors. The Adviser explores how brokers can become the adviser of choice for guiding SMEs through recovery and the various options to boost their cash flow, and why showing kindness and compassion is key at this juncture
If there is one thing brokers love seeing, it is their clients thriving in their small-to-medium enterprise (SME). One key to a business’ success (other than generating profit) is maintaining positive cash flow.
However, it has been well documented that SMEs are constantly constrained by poor cash flow, with some studies showing that it causes around 20 per cent of small-business failures in Australia annually.
An unexpected event like the coronavirus pandemic has thrown an additional curveball, with many SMEs facing a cash squeeze due to the impact of lockdown and border closures. While businesses had to use their spare cash to survive in 2020 – and benefited from repayment pauses and financial relief – they have been using funds to cover several months of expenses in 2021, placing additional pressure on an already strained cash flow.
The good news is there are multiple options available to SMEs to manage and boost their cash flow but business owners may not be aware of all of them. This is where brokers are primed to advise their clients on overcoming cash-flow obstacles.
Moreover, OnDeck national channel and partnerships manager Nick Reily recently told The Adviser that SMEs are well placed to benefit from a likely significant uptick in activity as confidence returns and we head into the busy holiday period. In fact, the SME lender has already seen a 175 per cent jump in broker-originated small-business loans between January and June 2021, compared to 2020.
Mr Reily says: “Pent-up consumer demand will likely flow to both consumer-facing businesses and business-to-business suppliers, especially as we head towards the Christmas period.”
Time needed to restore business confidence
On the other hand, Graham Lee, director of finance brokerage Commercial Finance & Leasing warns that despite the easing of restrictions, business confidence is not going to return overnight because SMEs still have to adhere to density limits and other restrictions, which could limit the number of customers they attract.
“It’s going to take some time to get the confidence back as businesses go from being totally locked down to being opened up,” Mr Lee tells The Adviser.
“SMEs have significant labour costs and will have to pay staff just to open the front door. In doing that, if you don’t have sufficient clientele coming in to cover those costs, it’s going be very hard to operate.
“SMEs are going to do everything within their power to get back on their feet but they’ve got to work within the current restrictions because they’re still limited with the numbers.”
As such, there has never been a better time for brokers to check in on their SME clients to ensure that they have sufficient funds on hand to cover costs as they open up, invest in inventory, staff, and equipment to capitalise on the festive season, and expand if they wish to do so.
Mr Reily advises: “Brokers can assist their small business clients by exploring finance options that deliver timely, rapid access to funding – cashflow finance when businesses need it, not in several weeks’ time when opportunities may be lost.”
However, it is up to the broker to initiate these conversations because clients might not realise that they could seek professional advice instead of going it alone.
Indeed, while business owners are filled with uncertainty about what measures to put in place for recovery post the COVID-19 crisis, fewer than one in five seek out strategic planning assistance and many find themselves being knocked back from traditional lending products, causing cash-flow issues.
One way brokers can help is by encouraging more business owners to undertake strong cash-flow forecasting, and ask them about what changes they intend to make, and whether they have clarity around how much working capital they would require. If they have any shortfalls, brokers could help them find new avenues to fund their businesses.
Mr Lee reveals that he has to push at least 30 to 40 per cent of his clients to focus on cash-flow forecasting, and advises brokers to recommend that their clients ask their accountants and business advisers to undertake forecasting, and focus on their budgets and break-even analysis.
“If their accountant is not qualified or up to speed with them, from time to time we will recommend an accountant that we believe could assist them. But at the end of the day, it’s the client’s decision,” he says.
Managing cash flow
Managing cash flow could pose a challenge for many SMEs that experience fluctuations in their cash balances as they receive sales and invoices at different times but brokers could provide tips to ease the burden for business owners.
For example, while overhead costs like rent, utilities, and equipment could erode cash flow, business owners could conduct regular audits of costs and cut back on non-essential expenses and use cash more efficiently.
Some business owners who may be facing cash constraints due to unsold and unused stock could consider offering sale discounts to retrieve some of the cash and avoid writing off stock. Moving forward, they could seek ways to improve sales forecasting to avoid stock accumulation in the future. They could also consider selling or renting unused equipment or property to generate additional cash.
The financing route
In addition, there are several cash-flow finance options that brokers could recommend to SME clients who wish to cover costs while they grow.
One of the most common options is debtor finance or invoice financing, where a business can use its invoices as security for a loan, especially if they have issues with the collection of monies from their debtors.
Indeed, recent research by the Productivity Commission on small-business access to finance and the evolving lending market showed that the most common reason for SMEs to apply for debtor finance was to maintain short-term cash flow or liquidity (47 per cent of those who had sought this option in 2018-19 cited this reason).
According to Mr Lee, debtor finance could accelerate the cash-flow cycle because the invoice can be sent to the lender the day it is created, following which the majority of the invoice amount is provided back to the SME client to assist with their cash flow.
While clients could also opt for overdraft facilities, Mr Lee warns that it does not provide the same level of flexibility in meeting ongoing commitments because the debt on the overdraft is “virtually right up to the limit”.
“If you’re utilising your overdraft to meet your day-to-day running costs and that’s the only thing you’ve got to manage your cashflow and you’re not getting the money back to reduce the debt on your overdraft, it’s just going to continue to go up towards the limit that’s in place or it may exceed that limit,” he explains.
Other options to unlock cash flow include applying for the federal government’s SME Recovery Loan Scheme, or using trade finance, secured term loans, unsecured business loans, and equipment finance.
And many lenders are tweaking products to help out. For example, ANZ recently upped the maximum loan term on sub $3 million business loans from 15 years to up to 30 years (when secured by suitable commercial property) to assist SMEs with cash-flow management by allowing lower repayments.
Meanwhile, OnDeck offers loans for unsecured funding up to $100,000 that can be funded in just a couple of hours.
Post-lockdown phase will be taxing
SMEs have been incredibly resilient in the face adversity over the past 18 months but the months ahead could be paved with additional challenges. Business owners are already experiencing pent-up demand from customers in the lead-up to the holiday season, coupled with long periods of damaged cash flow and disrupted supply chains due to the COVID-19 pandemic.
As such, it is critical for brokers to be compassionate when advising their SME clients on their finances because they are emerging from a period of devastating economic impacts.
Why is strong cash flow important?
Positive cash flow (where there is more money flowing into a business than out of it) would allow businesses to scale by purchasing stock, hire additional staff, or invest in assets and equipment.
Having an accurate cash-flow statement would allow businesses to track the amount of funds they have available at any given time, and make more informed business decisions.
Managing cash flow effectively could also allow business owners to gain a better understanding of where their expenses are (something that is not visible on a profit and loss statement), meaning they could identify areas where they could cut costs.
Furthermore, having strong cash flow could allow SMEs to make timely payments to their suppliers. Business owners must plan these payments in advance to ensure that they are not bombarded with multiple invoices or bills simultaneously without sufficient cash flow to meet their obligations.
Moreover, if businesses wish to expand, they would require sufficient cash to cover expenses like purchasing stock and leasing office space (all before they begin to see profits).
"You need to take into account different factors when helping SMEs with their cash flow and business finance loans. The three Cs of learning about the client (character, capacity, and collateral) are still well and truly taken into account but they’re assessed in a different way to how you would address a residential loan."
- Graham Lee, director, Commercial Finance & Leasing
"OnDeck has seen a significant uptick in demand for small business loans via the broker channel, which confirms that SMEs are looking for support from their brokers in their financing journey. So, there are plenty of opportunities for brokers to market their services to this segment."
- Nick Reily, national channel and partnerships manager, Ondeck
Malavika Santhebennur is the features editor on the mortgages titles at Momentum Media.
Before joining the team in 2019, Malavika held roles with Money Management and Benchmark Media. She has been writing about financial services for the past six years.
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