Small business finance and the credit crunch

I’m really pleased to welcome our latest guest blogger, Gill Millington, to SmallBizPod.  Gill has a wealth of knowledge about finance and small business which she’ll be sharing with us once …

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27th August 2008 at 6:52 pm

I’m really pleased to welcome our latest guest blogger, Gill Millington, to SmallBizPod.  Gill has a wealth of knowledge about finance and small business which she’ll be sharing with us once a month. Do check out her profile and say hello in the comments here, if you get a chance.

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I thought I’d use my introduction here on SmallBizPod to get the inevitable credit crunch post out of the way first.  How’s it affected you and what steps have you taken to counter the financial implications for your business? 

I’d love to hear what you’ve done on this front, but in the meantime here are a couple of suggestions from me.

What often happens when the economy takes a dip is you find you’re trading well with business still coming through the door, but your customers start  dragging their feet as they don’t have cash readily available to pay you. 

And then suppliers need paying on time to keep your accounts with them running, so the knock-on effect begins to get uncomfortable for your own cash flow.  It’s a vicious circle that, if not dealt with, will drag you down.

There are plenty of ways of easing cashflow, but I thought I’d take a look at the pros and cons of a couple of financial products for small businesses out there that might prove helpful.

Factoring

First of all, factoring.  What is it and how does it work?

A factoring company will take one of your greatest assets, your outstanding invoices and pay you a percentage of them up front as soon as they’re issued.  That’s the basic principle, but what are the costs?

There are typically two costs involved: a service charge expressed as a percentage of sales factored, and an interest charge for the cash advances. The service charge, covering sales ledger management, collections services, and if you wish, bad debt protection, can range from 0.60% to 3.0% of turnover.

So the downside?  Well certain types of business will only qualify for what is quite a low % of release of funds against invoice.  Some are typically as low as 60%, and should the invoice be queried, very often the factor will ask for a return of funds until the matter is sorted out. 

Another downside is that very often you will be signing up for a 12 month contract which could make the service expensive if you end up having problems with disputed invoices.

Wage Bill Advance

An alternative option is releasing the value of another major outlay, your wage bill.  There are various options on the market, but one in particular that I know well is called Wageroller

Basically, your wage bill is paid by Wageroller for two months or 9 weeks, thus allowing you to use this money for other things.  Then in the third month you pay for month one and so on, and your staff know nothing about it. They all get paid as normal.

Costs involved? Well you pay a one off set up fee for this that is typically in the £1k+ mark, then you pay various fees that would usually equate to approximately 0.75% of the amount outstanding that month as a monthly service charge.

With this particular service, you sign up for a mere 13 weeks and can dip in and out of it as and when you want.  You only pay the set up fee once, and need nothing more than management accounts to apply for it.  No business plan required, no credit checks, and very quick to arrange too.

The downside? You need to be a limited company that has filed accounts at Companies House and has a wage bill of £25K each month.  So that rules out the one man bands unfortunately.

Either product will certainly improve cash flow but talk to an advisor or your accountant to look at them in depth and make sure they fit your business.  You always want to make these types of financial services work for you, rather than you working for them.

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Gill started out life working for blue chip companies, finished working in CEOs' offices then followed a seemingly natural path towards running her own business. One venture failed but like any good entrepreneur she's gone on to learn from her mistakes and made a success of two businesses since. Having been involved in business finance and the money game for a number of years now her most recent company New Branch provides advice on commercial finance and other business services. http://www.newbranch.co.uk

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  1. It seems to me, the major credit crunch effect on businesses will be the banks hiking up costs of overdrafts to small/medium sized businesses. The main impact on the economy will be from the coming recession rather than the crunch. Wage-rolling is a new one on me, could provide a much-needed breather for some companies in the short-term – although if the money saved is not used to streamline the business, it will probably fail anyway.

  2. Ken Kaufman says:

    Factoring and getting an advance for payroll is a good idea for short-term funds, but a business has to be careful that they are still operating above break-even before they do this. If they are not above break-even, they are only fuding further problems.

    Also, it is important to include the cost of these financing options into the cost structure of the company to see how it impacts profitability.

  3. Simon says:

    Following up on wage rolling as a solution to funding a business, there were 2 companies offering this service. One being Wageroller and the other being Smartflow Finance. Both of these companies would pay the businesses wages for a period of up to 2 months at a time, this means they pay the employees net pay directly to the empoyees and the tax directly to the HMRC.
    The service was a good idea, however both compaines have gone bust due to the high risk business model that relied on getting credit to lend on.
    The result of both Wageroller and Smartflow Finance going into insolvency means that business customers will have 2 issues, a demand for repayment of the loan amount and having to make good outstanding any HMRC liabilites at the same time. Not a good thing in this current economic climate

  4. Hi Simon and many thanks for the update on Wageroller and Smartflow. I’m not surprised they hit trouble.

    Has your business used these services? Sounds like an interesting story we might want to follow up.

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