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Cash Flow & Forecasting Debt Collection & Credit Management Factoring, Invoice Discounting & Asset Finance Finance

Withdrawal of credit insurance exposes suppliers to greater risks

credit insurance removal increases risk to suppliersWhile it is true that running a business is always challenging the withdrawal of credit insurance is adding to the cash flow pressure on supply chains and in particular on retailers.
Trade credit insurance protects suppliers by minimising the financial impact if a customer fails to pay for goods and services.
The withdrawal of credit insurance is normally based on a company’s credit rating that in turn is adjusted based on disclosed accounts, county court claims, statements by directors and adherence to payment terms as information that is increasingly being provided by suppliers.
For more than a year, the retail sector has been in the spotlight due to the high profile restructuring of several large chains and there would seem to be little sign of this abating, according to recent reports highlighting the latest move, by Paris-based insurer Euler Hermes, which reduced the credit cover it provides to Iceland’s suppliers over the summer.
Euler Hermes is not the only insurer to have taken steps to reduce its exposure. Atradius has also been following the same path, removing cover last year from Debenhams.
According to the most recent figures produced by the ABI (Association of British Insurers) in the first quarter of 2019 the number of insurance claims made so far by UK businesses facing bad debts had reached its highest level in ten years.
It said that there were 5,114 new trade credit insurance claims made, up 6% on the previous quarter and that the value of claims paid was £48 million, up £1 million on the previous quarter. The average payment was £9,000.
So, it is perhaps not surprising that insurers are continuing to take steps to mitigate their exposure as insolvencies continue to climb in the face of political and economic uncertainty.
But the inevitable consequence is that the risk is being pushed back to suppliers, who in turn are reducing the amount of credit they extend to their customers. This is impacting on suppliers and their ability to maintain sales volumes to bigger customers.
For many suppliers with weaker balance sheets or who depend on a few large customers this can leave them taking the credit risk and often means waiting longer for payment.
Should SME suppliers continue to supply a customer if credit insurance is withdrawn?
It is all very well to advise SMEs to ensure they have a broad spread of customers perhaps with no one representing more than ten percent of the sales ledger, but opportunities need to be grabbed and growth is often achieved by taking some risks. It is a brave company that forgoes the benefit of having large and profitable customers. Despite this it is imperative to avoid being caught up in a domino insolvency if a key customer fails.
Growing a business takes time, forethought, planning and access to capital, none of which is available in abundance in the current uncertain national and global economic climate.
So, is there any way suppliers can protect themselves?
One route is to start to demand payment upfront, which may mean re-negotiating supply agreements, although it is debatable whether customers will oblige, which could then force the supplier into seeking help from the Late Payments Commissioner.
Another route could be to protect at least some of their revenue by using factoring or invoice discounting services. Both services tend to offer non-recourse facilities as a form of insurance to protect against approved but unpaid invoices. While this route involves credit insurance the finance providers often share a level of risk by underwriting better credit terms since they also want to make their own profits.
It is understandable that insurers will want to protect themselves but their service is a market and they may take a level of risk to get your business.
However risk is managed, there is a need for a strong balance sheet and credit management to avoid the fallout when a customer fails to pay your bills.
 

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Accounting & Bookkeeping Cash Flow & Forecasting Factoring, Invoice Discounting & Asset Finance Finance Insolvency

How can SMEs manage credit control and late payment effectively?

Prompt Payment Code: late payment penalty?There is no doubt that getting invoices paid on time can make a significant difference to SMEs’ cash flow and the lack of cash due to late payment can make or break a business.
Clearly, there are cash flow advantages for those late payers who string out paying their invoices for as long as possible, while the opposite is true for those waiting on the receiving end, often SMEs.
Towards the end of last year Xero Small Business Insights calculated that the average British small business is owed £24,841 in late payments on any given day.  It is clear that Government initiatives, such as getting businesses to sign up to its Prompt Payment Code, are proving less than effective. A year after the appointment of Paul Uppal, the small business commissioner, it was announced that his service had recovered just £2.1m in unpaid invoices on behalf of small companies. Pitiful!
All this has prompted the Government’s Business, Energy and Industrial Strategy Committee to call, yet again, for firms to sign up to the Prompt Payment Code and for the Small Business Commissioner to be given the power to fine companies that pay late. It says large firms should be legally forced to pay their small suppliers within 30 days.
In January Mr Uppal announced a traffic light warning system to be used to name and shame large firms that fail to pay their suppliers on time.
Will this strike terror into the hearts of persistent late payers and force a change of behaviour? I think not, although making it a criminal offence for directors would work, as currently is the case for HMRC’s Security Demands.

Do SMEs do enough to protect themselves from late payment problems?

Annual research by Bacs Payment Schemes showed that in 2018 small businesses in the UK faced a bill of £6.7bn to collect money they are owed by other companies, up from £2.6bn in 2017.
It is a problem that the FSB (Federation of Small Businesses) estimates is the reason for the collapse of around 50,000 businesses a year.
Some, however, would argue that SMEs should take more responsibility for and be more aggressive in recovering monies owed for the work they have done in good faith, but it’s hardly a level playing field. The cost of money claims through the courts is now horrendous.
Of course, a well-managed business should have a robust credit control system in place, which sets clear expectations from the moment it contracts for work, including a stated agreement with the client that invoice payment will be due within a defined number of days, usually 30.  It is wise to also credit check all new customers. It is also wise to check payment is scheduled for payment before it is actually due; this deals with most excuses in advance.
Payment should be made as easy as possible with online banking details and address for postal payments included on all invoices. If it is feasible perhaps a small discount could be offered to those who pay early or within a stated time period. A supplier to one of my manufacturing companies offers 90 day payment terms with a 40% discount if payment is made within 30 days. That’s my margin so late payment is painful.
The credit control system should also have clear, robust procedures for following up on late payers, from sending out reminder letters that make it clear that failure to pay will likely incur significant costs and disruption such as suspension of the account.
However, even with a robust system in place, and one on which the business acts, there may still be late payment problems and SMEs can use such services as factoring, where another company takes on responsibility for collecting and chasing invoices, or invoice discounting, where, again, another company takes on the task of chasing invoices but with the SME having ultimate control.
In both cases, however, these are fee-paying services, effectively “lending” money up front to the SME at less than the full value of the outstanding invoices. If you use such services do be aware that many have a recourse clause so make sure to check if you remain liable or have to reimburse the lender.
While borrowing against book debts might improve an SME’s cash flow, it comes at a price and often with hidden additional costs and conditions in the small print. This is where an independent broker, not an online one, is a useful ally when looking for book debt finance.
Another option is to take out credit insurance although this normally only pays out in the event of your customer going bust and doesn’t solve the late payment problem.
Why should a business have to pay extra/ lose part of its revenue in order to recover money promptly for work it has done in good faith?
What is needed is robust, effective legislation, and follow-up action, with sufficient teeth to eradicate this persistent problem once and for all.
A free guide to debt collection for SMEs is available for download at:
https://www.onlineturnaroundguru.com/p/getting-paid-on-time

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Accounting & Bookkeeping Banks, Lenders & Investors Cash Flow & Forecasting Factoring, Invoice Discounting & Asset Finance Finance

January sector focus: Fintech

using Fintech to make purchase in shopFintech is used describe new technology that seeks to improve and automate the delivery and use of financial services.
Originally the term was applied simply to technology employed at the back-end systems of established financial institutions.
Over time, however, the Fintech definition has been expanded to include any technological innovation in — and automation of — the financial sector, including advances in financial literacy, advice and education, as well as streamlining of wealth management, lending and borrowing, retail banking, fundraising, money transfers/payments, investment management, asset management and some would now also include crypto currencies such as Bitcoin and their administration.
Fintech is also sometimes described as disruptive technology, in that many Fintech start-ups are designed to provide financial services in non-traditional ways, such as by offering online shoppers to secure immediate, short-term loans for purchases, bypassing their credit cards or by offering online and App-only services that bypass traditional lenders.
While traditional lenders and finance providers have tried to adopt some of the Fintech innovations, they begin with burdensome overheads and cannot generally compete unless they embrace the need to fundamentally change their existing thinking, processes, decision-making, and overall corporate structure. This is not something most managers can cope with.
There is now a vast array of Fintech categories of which the following are just a few examples:
B2C for consumer banking activities such as arranging loans and providing customer credit facilities,
B2B for small business clients (as above)
B2B for small businesses for activities such as taking payments, credit management and managing debtor ledgers
B2C for consumers for activities such as contactless payment and payment by mobile phone, online banking, applying for financial services such as a mortgage or loan, online shopping payments and many more.

Fintech as a part of the UK economy

In 2017 at the first ever International Fintech conference argued that the UK was the leader in this sector with a competitive advantage in the provision of Fintech services due to its sophisticated financial community and the growth of technology hubs like Silicon Fen in Cambridge and Silicon Roundabout in London.
The phenomenon was described as being an essential aspect of the UK vision for “an outward-looking, Global Britain” which would not only provide a high skilled, high wage economy but would attract the best talent from all over the world.
At that time, according to Treasury figures, the industry was worth £7 billion to the UK economy and employed an estimated 60,000 people.
It has been calculated that there are almost three times as many UK banking and payments companies now than there were in 2005 while the rest of the world has seen theirs fall by around one-fifth on average.
In May 2018, Technation reported their research in an article in Information Age that the UK’s tech sector, of which Fintech is a part, was expanding 2.6 times faster than the rest of the UK economy, with Fintech start-ups located not only in London but throughout the UK.
The Technation analysis also looked at the impact of Brexit on the sector, finding that by and large tech firms were undaunted by the prospects of leaving the EU.
However, Financierworldwide, provided a more sober analysis, identifying some of the potential challenges to Fintech.
These included future freedom of movement of labour and the absence of sufficient numbers of skilled tech workers available in the UK, the loss of the ease of the passporting of services to other EU markets and consequently the decision Fintech companies may face of whether to relocate to other countries in Europe, at least in the short term. Among the cities expected to be most likely to benefit from welcoming such moves are Dublin, Paris and Berlin.
There is also the worry that the loss of passporting rights after Brexit would deter the currently high levels of investment in UK Fintech.
Finally, regardless of Brexit, if Fintech is to thrive, after a year of seemingly frequent banking technology meltdowns, not to mention hacking scandals, there needs to be much more robust and secure protection against fraud and data protection. To achieve this we at K2 have invested in Tricerion as the future of login security. Check it out at www.tricerion.com.
 

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Banks, Lenders & Investors Cash Flow & Forecasting Factoring, Invoice Discounting & Asset Finance Finance

Are SMEs really unaware of asset finance or are they simply not borrowing?

asset finance predators?
Predators hunting prey

Last year the website smallbusiness.co.uk, published research findings that seemed to indicate that many SMEs were unaware of the benefits of asset financing.
Its report, citing research by Close Brothers, said that “almost three-quarters (72 per cent) of SMEs in the survey did not know it was possible to secure finance against their turnover” (by which we assume they mean cash flow funding which in practise means book debt), rather than their credit rating.
It also reported that while 44% of SME respondents would consider using asset finance they were not acting on this.
It suggested that many SMEs were sticking with “inflexible and often unobtainable forms of credit” because they weren’t aware of the potential advantages of alternative funding options.
The inference, in other words, was that SMEs were continuing to approach the mainstream banks, despite the widespread perception that the banks were inflexible and unwilling to lend to them.
But how true is this?
Over the 18 months or so since there have been more pronouncements from asset finance providers.
In January this year CityAM quoted the MD of a business finance group, Peter Alderson, who said: “more are exploring financial options outside of traditional bank offerings that can support the level of business development needed to compete in new tech and online spaces.”
In the same month businessmoney.com reported on a survey of brokers operating in the asset finance carried out by United Trust Bank and revealing that 39% of them expected demand for asset finance would grow throughout 2018, identifying the most likely sectors for growth as Construction, Transport, Waste Management and Manufacturing.
Martin Nixon, head of asset finance at United Trust Bank, commented: “There’s no doubt that awareness of asset finance is growing amongst UK SMEs. Lenders, brokers and industry bodies, such as the FLA and the NACFB are working hard to spread the word about the versatility and flexibility of asset finance and how quickly and easily transactions can be completed.”
This may be true, but according to the British Chambers of Commerce (BCC) borrowing among SMEs appears to have stalled.
The BCC yesterday released the results of a study it carried out with the specialist finance provider Wesleyan Bank which found that 56% of British companies did not attempt to apply for finance in the past year. Almost two thirds (63%) of them were small firms.
The study found that those that did seek finance showed a clear preference for the “conventional” which it identified as overdrafts (18%), business loans (16%) and asset finance (9%) and that half of these reported that they did so because of weak cash flow.
The BCC’s head of economics, Suren Thiru suggested that the results revealed a move from the “credit crunch to credit apathy where a lack of demand, rather than supply of finance is now the overriding issue”.
He called for the Government to do more to kick start business investment and to relieve the burden of business costs.
But is it any wonder that two years of uncertainty and opacity about the Government’s proposals for Brexit has led to the perception among businesses that the Government neither understands or takes heed of their concerns and that SMEs are holding back on growth and investment plans?
I would argue that it is not ignorance of asset finance but cost and a fear of a loss of control of assets.
The recent memories of lenders and their insolvency practitioner advisers seizing assets as an early response to default is too recent for business owners to believe that behaviour has changed and that it won’t happen again.
We advise most of our clients to consider building their balance sheet based on slower growth rather than rapid growth based on asset-based finance. It takes one slip for the advisers and lenders with penal default clauses to see profit from misery.

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Banks, Lenders & Investors Cash Flow & Forecasting Factoring, Invoice Discounting & Asset Finance Finance

Buy or rent? How can SMEs avoid some hidden pitfalls?

The words: “If it appreciates, buy it, if it depreciates, lease it” are generally attributed to John Paul Getty, the oil billionaire who died in 1975.
While on the face of it the maxim makes eminent sense, the economic world in which 21st Century SMEs live is infinitely more uncertain and complex, thanks to such influences as globalisation, the 2008 financial crash and, more recently, UK’s decision to leave the EU.
buy or rent contractsNot only that, most service suppliers want to lock in clients for long-term contracts similar to traditional property rental agreements.
Furthermore, long-term agreements, like financial contracts have become increasingly complex.
Modern businesses that provide lease or rental agreements often have terms and conditions that mean the lessee cannot just hand back whatever it has leased, not to mention the payment of financial penalties if they wish to terminate a lease early. These contracts mean that a business is left with a liability rather than an asset to realise.
If an asset is depreciating, it does beg the question as to whether a lessee shouldn’t wait for it to devalue to a point that justifies buying it second-hand. However, whether you are leasing or renting you will always be funding the depreciation, as well as profit for the vendor and lender.
Where a business is considering investing in new plant or equipment to facilitate growth the cashflow argument is that leasing allows it to upgrade or improve without making a substantial, upfront investment. This may not benefit profits when compared with alternative ways of funding the asset.
It can also make sense where a business depends on equipment such as office computers that can become obsolete in a relatively short time.
However, my perspective on this is that there is an assumption that everyone makes that there is, or can be, continuous growth and that therefore it is worth waiting to return an asset.  But if circumstances change you end up with the liability of having to continue paying when you no longer need it. An example of this is most cars are now sold under a PCP deal. Personal Purchase Contracts are not purchases but leases with horrendous terms that are applied to make the monthly payment look reasonable, however the cars cannot be returned early without incurring a huge penalty.
We would argue that the better strategy is to own or lease assets on short term agreements. Owned assets can be bought using hire purchase finance providing the asset can be sold with the funds clearing the HP settlement value. Shopping around for HP deals is likely to find a better one than that offered by the vendor. Short term agreements are more tricky and the small print needs checking but essentially you are looking to avoid being locked in to a long-term contract or one that is expensive to terminate.
You should be wary of long-term agreements with break clauses like those used in property lease agreements. They normally include conditional clauses which often mean the break clause cannot be triggered. One example is that all payments must have been paid o time, another is the notice period for triggering the break clause can be unduly long, and there can be many others.
While you might be familiar with agreements for office or factory premises and for company cars, plant and machinery, the above advice also applies to services including telephone hardware, telephone, mobile and broadband services, computer software, website hosting, email and IT services, office plants, hand driers, sanitary and other washroom services, alarm, security camera and guarding contracts, furniture, I have even come across concrete laid in the com car park provided under a long-term finance agreement.
When circumstances change businesses can find that being locked into a long-term agreement can turn an asset into a liability. Many long-term leasing agreements may look cheap but can become a straightjacket.
On the other hand, the asset can simply be returned if rented on a short-term basis or sold if the asset is owned. You will certainly improve your cash flow by saving the ongoing cost of rental or HP obligations and might even realise some cash.

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Banks, Lenders & Investors Cash Flow & Forecasting Factoring, Invoice Discounting & Asset Finance Finance Insolvency

Can SMEs afford to use invoice discounting and factoring?

invoices in filing cabinetBoth invoice discounting and factoring are a means by which a business can borrow against the value of its invoices before they have been paid.
They can be a useful way of funding working capital and managing cash flow, especially for a rapidly growing business, but they also come at a cost.
Not surprisingly the finance comes at a cost which will depend on the services being provided, interest charged and risk of loss to the lender, some being less scrupulous than others.
The amount charged will cover interest on funds drawn and a service related fees. The service fees will change depending on the volume of invoices, value of invoices, concentration of invoices, percentage drawn down, maximum amount borrowed, the level of monitoring necessary and any credit insurance. They can also include set up, audit and introduction fees.
The funding agreement, often hidden in the small print, will include event fees such as termination fees, default fees, collection fees, notice penalties. Many also require the support of personal guarantees. On the face of it they can’t lose money, but you would be surprised at how many do.

What is the difference between invoice discounting and factoring?

With factoring, the service provider takes on managing the sales, ledger, credit control and chasing of invoice payments. With Invoice discounting the business remains responsible for its sales ledger and invoice chasing.
When considering whether to use either service businesses should weigh up the costs against the benefits of freeing time to manage the business (particularly in the case of factoring) and the enhanced control over cash flow, especially if it is intending to grow.
However, again, particularly with factoring, other borrowing avenues will be restricted because book debts will not be available as security.  While this choice provides some protection against bad debts, factors will also restrict your borrowing against poor quality debtors by either disallowing them for borrowing purposes or recording them if they aren’t paid within terms.
In terms of customer service, a business will need to consider the effect on its customer relations of having no direct contact with the business, and especially, how the factoring service treats its customers.
With invoice discounting a significant consideration is how robust the business’ in-house credit and invoice processes are and how the service compares with the rates that may be charged on an overdraft or bank loan. It should be pointed out that banks no longer want to provide overdrafts as a way of funding book debts.
In both cases, the event fees can be sufficiently large to justify some lenders looking for reasons to trigger them. Even with scrupulous lenders, regular defaults become a problem for both parties.
While both services may be an option to consider for a healthy business, it is questionable whether they are helpful to a business that is already in financial difficulty. Turnaround advisers often find themselves having to negotiate on behalf of companies with factors and invoice discounters to persuade them not to pull the plug when, although the money loaned is covered the lender wants to end the relationship and recover their money.

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Accounting & Bookkeeping Banks, Lenders & Investors Factoring, Invoice Discounting & Asset Finance Finance General

Fintech for SMEs

Fintech mobile phone bankingFintech is a topic much discussed in business publications, often in hyperbolic terms, but very few can define it precisely.
Initially, Fintech, short for financial technology, was the word for the technology used in the plumbing as the back-end of established consumer and trade financial institutions.
However, according to the online financial dictionary Investopedia, Fintech now denotes a range of technological innovations in the financial sector, including in financial literacy and education, retail banking, investment and crypto-currencies like bitcoin.
This wider definition more accurately describes the range of possibilities for SMEs to use financial services and engage with the financial sector especially as some Fintech services, we would argue, are revolutionary and open up services that were previously only available to large companies.
Part of the problem lies with the mainstream banks, lenders and most of the traditional suppliers of financial services including factoring, invoice discounting, fund raising and advice, who have remained deeply conservative in the way they do things and the way they charge for their services. Many have not benefited from the technology revolution, or if they have they haven’t passed on that benefit to SMEs.

How can SMEs benefit from Fintech?

SMEs can benefit from significantly reduced costs by bypassing traditional ways of using financial services, and in many instances by bypassing the traditional suppliers.
Fintech has done much to disrupt traditional models, for example, peer to peer lending via firms like Ratesetter and Zopa and equity crowdfunding via CrowdCube or Seedrs has grown. These online platforms now provide alternative sources of lending and investment to SMEs who no longer need to use their bank or finance brokers to fund their business.
Entrepreneurs can, via an online platform, pitch directly to the world for loans or investment in their companies and ideas. While they may still have to produce a sound business model and show that there is a market for their idea, online models can speed up the funding process dramatically.
Another benefit of Fintech has been mobile payment and currency conversion as innovative methods of swiftly and economically transferring funds across geographical borders. Online and cross border payments are undergoing a secondary Fintech revolution with Blockchain technology and crypto currencies like Bitcoin and Ethereum gaining traction.
Blockchain, as an open, distributed ledger system that records transactions between two parties efficiently in a verifiable and permanent way, is likely to fundamentally change the way we do business and offers opportunities that none of us have yet considered.
Payment systems, such as Go Cardless, Paypal and Stripe alleviate the cost and bureaucracy of invoicing and collecting payment, removing the need for debit cards, credit cards and expensive merchant service accounts.  This is of benefit both to consumers buying online and to businesses selling goods or services to consumers and to other businesses.
Other areas where Fintech offers fast and efficient services are in monitoring, tracking and managing accounts and financial transactions. Mobile technology provides users with information in their hand to provide accurate information and allows entrepreneurs to make timely decisions.
Finally, for those who have the skills and knowledge, the opportunities for developing ever more innovative and useful Fintech ideas and converting them into a viable business are only going to increase.

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Business Development & Marketing Cash Flow & Forecasting Factoring, Invoice Discounting & Asset Finance Finance Insolvency Turnaround

The Pitfalls of Overtrading

businessman turning out pocket empty of cashA business that is overtrading is one that is at risk of becoming insolvent.
Overtrading is when a company is growing its sales faster than it can finance them, in other words, spending money it hasn’t got by taking on additional orders when it can’t afford to service or fulfil them.
This relates to a lack of working capital to fund the business and the cash cycle of contracts where creditors are often paid before payments are received from customers.
In this way a company can be profitable and yet run out of cash.
While it is healthy for businesses to pursue growth, a lack of honesty with themselves and their situation and a lack of forward planning can put them in this position. The rate of growth needs to be realistic for several reasons, including resources and capacity, both of which normally require funding ahead of income.
While there may be a strong temptation to say “yes” to new orders, a business needs to be sure those orders can be fulfilled, not only to avoid damaging its reputation but also because ultimately it can lead to insolvency.

How can a business avoid overtrading?

When there are more orders coming in than there is capacity to cope with, one solution is to price work in a way that manages demand. This need not be simply by putting up prices but more by having a pricing strategy. It may be necessary to protect the relationship with long term customers by pricing loyalty and long term commitments. Alternatively, future orders or flexible delivery might be priced at a lower rate than late orders and short notice delivery rather like the airlines. It may be that there is scope for staff to work overtime and share the benefit of increased prices.
Another way of looking at demand is to sell capacity rather than goods and services. A well-organised business ought to schedule work and know when an order can be easily fulfilled albeit on its own terms. By managing customer expectations, such as for a longer delivery timetable, a business can establish a pipeline of future work to keep everyone busy, at a level that works for the resources and capacity.
Ideally, when a business is planning for growth, it should look carefully at its finances before it starts any marketing or sales activity with this goal in mind.
For SMEs, this could include looking at the possibility of accessing regional growth funds and other cash flow and asset finance options, providing they can meet the conditions. If more funds are available then a higher level of growth can be achieved.
Negotiating arrangements with suppliers may be another possibility, especially if the business has a long-standing and good relationship with them. They might value longer term commitments and provide extended credit terms.
Another solution is to manage trading terms with customers, for example by requiring the payment of a deposit up front, stage payments, payment on delivery or reduced payment terms.
Using factoring and invoice discounting as a means of freeing up finance to pay fund orders may also be a solution as this will provide access to cash before an invoice is paid.
Having a product or service for which it is clear there is a substantial demand is not enough.  To grow a business, resources and working capital are needed if it is to avoid the consequence of overtrading: insolvency due to running out of cash.

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Banks, Lenders & Investors Cash Flow & Forecasting Factoring, Invoice Discounting & Asset Finance Finance General Turnaround

SMEs: financial caution, fragility and risk in an uncertain world

small business financeSMEs in the UK are being super-cautious about finance according to new research on SME resilience carried out by the company Hitachi Capital Invoice Finance.
At the same time, their research has found, many are in a precarious position because they are relying too heavily on a single large client.

Some details from the research 

27% of the 500 SME respondents had put investment plans on hold and were not planning to make any investments over the next 12 months but were concentrating on survival, while 57% of them had not sought any external finance in the previous 12 months. 41% of them said they were using overdraft facilities to fund their businesses and more than half said they were worried that Brexit would not only impact on their access to finance but would make it more difficult to obtain credit in the future.
Another worrying finding from the research was the numbers of SMEs, 17%, where a single large client was responsible for more than 50% of their turnover while a majority said that their biggest client represented more than 26% of their revenue.
This combination of caution about investment and external finance and the exposure that relying to such a significant extent on a single large client does not paint a picture of a buoyant, robust and optimistic SME sector.

Are there solutions?

Clearly SMEs need to develop contingency plans to allow for the loss of clients in the coming uncertain and likely volatile months with the aim of having no more than 10% of their revenue from any one client.
A revisit to their growth strategy to reposition activity to more strenuous efforts at finding new clients to balance their income profile regardless of whether they are earning good money from a large client. While they are in this position it may be wise to revisit the sales targets and marketing budget and to invest more in their growth strategy.
It is also true that SMEs need to see some significant recognition of their difficult trading conditions from the Government.  In the last year or two they have had to contend with compulsory pensions auto-enrolment, a rate revaluation and the prospect of significant additional costs from the proposal for quarterly tax returns. More recently there has been the volatility of £Sterling on the currency markets since the Brexit decision and rising import costs and gloomy prospects for inflation.
Nevertheless, life could be made somewhat easier for SMEs if there were some significant recognition of SMEs’ importance to the UK economy and jobs and some practical commitment in tomorrow’s Autumn Statement to investing properly and quickly in improving both the UK’s physical infrastructure such as roads and rail for freight transport, and real signs of progress on getting reliable digital infrastructure, such as high speed broadband to the many SMEs that are based throughout the country in rural locations and small towns.
Let us see what tomorrow’s Autumn Statement brings us.

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Banks, Lenders & Investors Business Development & Marketing Factoring, Invoice Discounting & Asset Finance Finance General

Is raising finance from debt crowdfunding a good idea?

In the second in our series on crowdfunding we’re focusing on debt crowdfunding, also called Peer to Business lending.
Typically lenders are looking to finance tangible assets that they can secure, such as book debts, vehicles or plant & machinery. However all too often businesses want to finance business growth which might involve business development, staff or simply working capital. The banks have largely withdrawn from such funding unless security can be provided. As a result there is an explosion of crowdfunding with most models based on loans.
In the debt crowdfunding model most loans are based on compounding interest with equal monthly repayments for the duration of the loan which is normally for between 2 and 5 years.
According to Nicola Horlick, chief executive of Money&Co, writing in CityAM in April 2015, debt crowdfunding is the source of funding for the vast majority of UK SMEs. She argues that this type of crowdfunding is less risky than equity crowdfunding because of the high failure rate of start-ups, whereas a debt funder like herself will ask for several years of made-up accounts.
Funding Circle is probably the best known debt crowdfunder in UK. It has loaned about £750 million to 7,300 businesses in UK and US. Examples include Blood & Sand who borrowed £104,000 in October 2014 from 100s of individual lenders to refurbish their new cocktail bar in London.
Given the risks, such loans are not much cheaper than those from a bank but they tend to be easier to obtain. However despite the perception of an easy loan, most funding platforms rely on directors giving a personal guarantee so as to make sure that they have every intention of repaying the loan.

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Accounting & Bookkeeping Cash Flow & Forecasting County Court, Legal & Litigation Debt Collection & Credit Management Factoring, Invoice Discounting & Asset Finance Finance Rescue, Restructuring & Recovery Turnaround

Can SMEs afford to recover debts?

From this week SMEs wanting to pursue recovery of a debt of £20,000 or more through the civil courts will have to pay an advanced fee of £1,000 or more.
The fees for civil courts have been increased by an estimated 600%, on a sliding scale calculated at 5% of the value of the amount claimed.
The payment has been increased by more than the actual cost of court action and is therefore called an “enhanced” fee.
The worry is that debtors will have even less incentive to pay what they owe if they suspect their creditor cannot afford the court fees to recover debts.
SMEs would be well advised to take even greater care to protect themselves when taking on new customers. For B to B services it is always advisable to check the credit history of a potential business client and be very clear on the wording of any contract.
Businesses should also check the small print of any credit insurance they might have. They need to know the cost of making a claim in addition to that for the credit insurance as claims normally require proof of default such as getting a court judgement and enforcing this before being able to make a claim.
This also may justify factoring where the finance provider normally collects the debts, although beware any recourse clause that allows them to transfer uncollected debts back to the company.
For both B to B and B to C businesses it is also advisable to review credit risk and terms such as deposits, significant early payment discounts and security including personal guarantees should be considered. Why wouldn’t a personal guarantee be provided if the client’s intention is to pay the debt?
A supplier of goods to Viper Guard, my vehicle parts company, offers a 30% discount for payment within 30 days. They always get paid on time.
While final approval was passed in the House of Lords last week, it is expected that the Law Society and other lawyers’ representative bodies will seek a judicial review of the legality of the new charges.

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Accounting & Bookkeeping Cash Flow & Forecasting Factoring, Invoice Discounting & Asset Finance Finance Insolvency Rescue, Restructuring & Recovery Turnaround

Does your business have adequate procedures in place?

Procedures can help avoid nightmare situations like the example below.
We came across an extreme example recently of how seemingly small things can escalate to create a massive problem.
A drum of cable was ordered and delivered to a company from a supplier. The goods were delivered to one site, but the delivery note was sent by email and signed for by someone at head office, who did not check the actual delivery.
The supplier subsequently sent an invoice to the accounts department at head office, located at a different site to the delivery address. The invoice was for £55,000. Nothing was done to check validity of invoice until the company received notice of intention to issue a Winding Up Petition from the supplier’s factoring company.
It was only at this point that anyone looked at the details on the invoice. Clearly, delaying payment is one issue but the situation has been made worse by leaving it so late to deal with the realisation that something was fundamentally wrong as the usual price for a drum of cable was in the region of £2,800.
Unfortunately, although the price on the order was wrong, goods had been supplied and a delivery note was signed. This was reasonably taken as confirmation that the client was happy to pay an invoice for the amount on the order. Even the creditor’s approach to dealing with late payment was logical.
The problem was trying to resolve the situation.
This could all have been avoided if the company had had any one of a number of procedures in place.
Possible procedures include using approved suppliers, checking prices, checking orders, inspecting goods, not signing delivery notes without carrying out checks, approving invoices for payment and approving payment, which could have avoided this situation.
The key message is that procedures prevent small problems from escalating into nightmare situations.
Do you have adequate procedures in place?

Categories
Cash Flow & Forecasting Factoring, Invoice Discounting & Asset Finance Finance General Insolvency Rescue, Restructuring & Recovery Turnaround

Is there a solution for SMEs struggling with lengthy payment terms?

Large companies that impose lengthy periods of ‘end of month plus 90 days’ for invoice payment present a dilemma for small businesses.
On the one hand it may bring in large orders and be good for their reputation as a supplier to a well-known large brand. On the other hand, however, the lengthy wait for payment can cause serious cash flow difficulties.
Large companies are getting away with imposing such terms despite being named and shamed, the latest being beer company AB InBev (payment in 120 days) and Heinz (payment extended to 97 days).
In an attempt to hold companies to account, the Federation of Small Business (FSB) has called for a compulsory code committing large companies to displaying their maximum and average payment terms.
While we can certainly sympathise with the outrage over this behaviour and agree with FSB’s request that firms disclose their longest and average payment terms, there are ways that SMEs can fund themselves while they wait for payment.
Apart from an overdraft or loan secured against assets such as the sales ledger the obvious solutions are factoring invoices (selling debt) or invoice discounting (borrow against invoices). There are other sources that can help fund working capital such as credit to customers. These include the alternative and online funding markets that have a number of sales ledger and single debt offerings including the prospect of selling or borrowing against as single invoice. Another solution is trade finance, although quite specialist it is useful for funding large transactions and especially useful for SMEs when they get a large one-off order.
K2 publishes a Business Finance Guide covering a wide range of options for business finance, available free through the Knowledge Bank on our website

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Banks, Lenders & Investors Cash Flow & Forecasting Factoring, Invoice Discounting & Asset Finance General Insolvency Rescue, Restructuring & Recovery Turnaround

How can smaller businesses fund growth in the economic upturn?

 

A new report by the Credit Management Research Centre and Taulia has revealed that UK companies have been relying heavily on trade credit.

It is also well known that traditional bank lending to SMEs declined by 20% in the last 12 months.

This is despite bank claims that they have plenty of cash to lend and a perception that they are declining loan applications. More realistically the decline in bank lending is down to loan criteria being tightened and the fact that credit worthy companies have been paying down loans instead of funding growth.

So how are small businesses going to fund the expected increase in business and orders that come with economic recovery from recession?

If a company accepts orders without being able to finance them it runs the risk of insolvency through overtrading, which is why so many commentators point out that most insolvencies occur during the upturn after a recession.

Given that many good businesses have used the recession to pay down debt, it can be assumed that their balance sheets have improved and therefore they will be easily able to raise finance for growth from the banks.

However there are a lot of SMEs that do not have a strong enough balance sheet to justify traditional funding. Where these sources are not available they are looking to fund growth using alternative sources of finance.

In the past such sources were myriad, such as from friends and family, negotiating deals with well funded suppliers, early payment terms from customers and even credit cards, but the banks remained dominant. Over the past 20 years asset based lending has grown since it can advance more funds than the banks due to the specific pledge nature of its security. More recently we are seeing a new route to finance from peer-to-peer and crowd funding websites.

The website based sources appear attractive and are often easier for obtaining funding but they can incorporate obligations such as a personal guarantee for the loan from the directors.

In April 2014 the FCA (Financial Conduct Authority) introduced new rules on loan-based (money loaned) and investment-based (share subscription) crowd funding that require the lenders to carry a certain amount of capital, to be open about defining the risks and to have resolution procedures in place in case of the lending platform failing.

It is likely that the online funding platforms will become stricter and require more information from borrowers before making a decision, but if used wisely they offer a great source of funding to growing SMEs.

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Banks, Lenders & Investors Business Development & Marketing Factoring, Invoice Discounting & Asset Finance General

Is the Economic Recovery Being Imperilled by Banks’ Continued Failure to Lend to SMEs?

Despite government rhetoric, evidence continues to pile up that the banks are still not lending to Small and Medium-sized Enterprises (SMEs).
We are hearing that when companies apply for any lending the banks are only considering loans or overdrafts secured on tangible assets, with most also demanding personal guarantees from the directors in addition.
Total net lending by the UK’s five main banks fell in 2011 and they missed their lending target to small firms, whose use of bank overdrafts and loans has also declined over the past two years.
The FSB reports that of 11,000 SMEs just one in 10 obtained a bank loan in 2011 and that 41% of applicants had been refused loans in the three months to February 2012. The FSB believes the UK banking system is not geared up to lower end loans of less than £25,000, because “there’s no money in it”.
Business Secretary Vince Cable has warned that recovery is being imperilled by the “yawning mismatch” between bank lending and SME demand for finance and at the end of April economists at Ernst and Young predicted that they expected lending to reduce further this year by 6.8 per cent, to £419 Billion.
Meanwhile invoice discounting and factoring have increased significantly, though banks are seemingly no longer offering these facilities, leaving the door open for independent companies such as Bibby, Close, Centric, SME, Ulitmate and the new British bank, Aldermore.
Are the banks struggling or are they simply withdrawing from the SME market?
We think the banks are being deceitful. Whatever the rhetoric, they are using PR tactics to report new loans, which are in fact not really new lending but the refinancing of existing facilities such as turning an overdraft into a term loan or a factoring facility.
This is piling even more pressure onto small businesses because there is a net decline in the flow of money into SMEs, and furthermore any new money is being provided at a very great cost in terms of fees and interest. While high rates of lending may be justified by the risk when it is unsecured, it is not justified when the loan is secured.
K2 would be very interested to hear from SMEs that have managed to secure a bank loan.

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Banks, Lenders & Investors Cash Flow & Forecasting Debt Collection & Credit Management Factoring, Invoice Discounting & Asset Finance General Rescue, Restructuring & Recovery Voluntary Arrangements - CVAs

Businesses Should Pay Down Debt and Beware Offers That Seem Too Good to be True

Many businesses are overburdened with debt and desperate for ways to deal with pressure from banks, HMRC and other creditors. All too often they are prepared to pay off old debt by taking on new debt which leaves them vulnerable to unscrupulous lenders.
Prior to 2008, interest-only loans and overdrafts were a common method of funding, and were reliant on being able to renew facilities or refinancing.
Like many interest-only loans, an overdraft is renewed, normally on an annual basis, but it is also repayable on demand. What happens when the bank doesn’t want to renew the overdraft facility?  With the economic climate continuing to be volatile and uncertain and banks under intense pressure to improve their own balance sheets, they are increasingly insisting on converting overdrafts to repayment loans and interest-only finance is disappearing.
This has created a vacuum for alternative sources of funding to enter the market where distinguishing between the credible salesman and the ‘snake oil’ salesman can be very difficult. Desperate businesses are desperate often try to borrow money and become more vulnerable to what at first sight seem to be lenders that can offer them alternative funding solutions that the banks cannot.
Generally the advice is to beware, as the recent eight-year prison sentence handed to “Lord” Eddie Davenport illustrates.  The charges related to a conspiracy to defraud, deception and money laundering, also referred to as “advanced fees fraud”. 
The court found Davenport and two others guilty in September. Meanwhile a large number of businesses had paid tens of thousands of pounds for due diligence and deposit fees for loans that never materialised and left victims even deeper in debt. The case only became reportable in October, when restrictions were lifted.
Many businesses just want to survive and are trading with no plan or in some cases no prospect for repaying debt. In such instances they should be considering options for improving their balance sheet by reducing debt. Options might include swapping debt for equity, or debt forgiveness by creditors or setting up a CVA (Company Voluntary Arrangement).

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Accounting & Bookkeeping Cash Flow & Forecasting County Court, Legal & Litigation Debt Collection & Credit Management Factoring, Invoice Discounting & Asset Finance General Interim Management & Executive Support Rescue, Restructuring & Recovery

Companies are failing to manage Debt Collection and Credit terms

Many companies are risking their own solvency and ability to carry on trading because they neither manage their debt collection proactively nor have clear procedures for setting and imposing credit terms with their customers. Consequently they are suffering from late payments, or worse having to write off invoices due to bad debts.
They compound the problem by extending credit to customers who turn out to be a bad risk.  If a customer is itself borrowing money under a factoring or invoice discount facility then the company is depending on their customer’s customers thus creating a pack of cards that if recoursed as a bad debt after 90 days could bring down everyone in a supply chain.
I believe the root of the problem to be the company’s own credit management where I find that very few companies have a robust system in place.
The key steps are to do a credit check on any new customer, to set limits, manage them and regularly review customers’ credit levels.
Getting paid however requires more than just a credit check, it involves starting management of invoice payment long before it is due. Checking the invoice is approved for payment for example, will avoid discovering that the order was not fulfilled exactly as required, or the invoice has not been received! 
Paperwork is crucial. There should be a procedure in place whereby the delivered/ completed order is signed for/ off with a clause on the document that includes written confirmation that the customer’s requirement has been satisfactorily fulfilled.
In addition companies also need late payment procedures. If an invoice remains unpaid after the due date, a robust system for managing late and non paying customers should include putting a stop on processing any further orders and debt collection that may result in litigation, and enforcement if necessary.

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Banks, Lenders & Investors Factoring, Invoice Discounting & Asset Finance General Rescue, Restructuring & Recovery Turnaround

It is obvious why Bank Fees are High and Business Lending is so Difficult

The figures for January to March showed a shortfall of 12% against the £19bn that represents a quarter of the annual £76bn target agreed with the government under the Project Merlin scheme for lending to smaller businesses.
Only 16% of FSB members had approached banks for credit and 44% of those had been refused, including some seeking credit to fulfil firm orders.
Growing businesses need working capital to fund the goods, materials, marketing and staff for new growth. While some of that can be obtained by borrowing against the sales ledger (through factoring and invoice discounting), the banks are seeing them as too high risk.
This is actually a reasonable response by the banks where businesses have been clinging on by their fingernails since the 2008 recession and, having used up most of their working capital on paying down old loans, are therefore according to the bank models seen as at high risk of insolvency.
It is a vicious circle. Less working capital means businesses neither have sufficient funds to buy materials to fulfil orders nor are they adequately capitalised to justify new loans.  This is why it is very common for businesses to go bust when growth returns following a recession.
Once banks are realising that a company with outstanding debt is in difficulty, they are providing for the bad debt by adjusting their own capital ratios to cushion against increased risk and in anticipation of the new Basel lll rules requiring bank Tier 1 capital holdings (equity + retained earnings) to rise from 2% to 7% to be phased in from 2015 to 2018.  
The result is higher fees and higher interest rates to businesses and it is no surprise that some companies already seen as a bad risk cannot borrow money, even when orders are rising.
Businesses that have used their land and buildings to secure loans or mortgages may also face huge risk related costs due to the bank’s exposure because banks already have so much commercial property as security that cannot be either leased or sold. The bank will therefore impose penal fees in a bid to recover the provisioning costs.
It has never been more urgent for businesses to mitigate this catch 22 by calling on expert help to look at fundamental solutions and recognise they will not be able to borrow money to limp along as they have been for the last two years.

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Cash Flow & Forecasting Debt Collection & Credit Management Factoring, Invoice Discounting & Asset Finance General Rescue, Restructuring & Recovery

Do Small Businesses Understand Working Capital and Liquidity?

When borrowing against current assets, such as the sales ledger using factoring or invoice discounting or against fixed assets like plant and machinery or property, there seems to be a widespread misunderstanding among businesses about business funding and, in particular, working capital.
While credit is the most common form of finance there are many other sources of finance and ways to generate cash or other liquid assets that provide working capital. Understanding these is fundamental to ensure a company is not left short of cash.
Businesses in different situations require finance tailored to their specific needs. Too often the wrong funding model results in businesses becoming insolvent, facing failure or some degree of painful restructuring. In spite of this, borrowing against the book debts unlike funding a property purchase is a form of working capital.
Tony Groom, of K2 Business Rescue, explains: “Most growing companies need additional working capital to fund growth since they need to fund the work before being paid. For a stable business where sales are not growing, current assets ought to be the same as current liabilities, often achieved by giving and taking similar credit terms. When sales are in decline, the need for working capital should be reducing with the company accruing surplus cash.”
Restructuring a business offers the opportunity of changing its operating and financial models to achieve a funding structure appropriate to supporting the strategy, whether growth, stability or decline. Dealing with liabilities, by refinancing over a longer period, converting debt to equity or writing them off via a Company Voluntary Arrangement (CVA), can significantly improve liquidity and hence working capital.
While factoring or invoice discounting, like credit, are brilliant for funding growth, businesses should be wary of building up liabilities to suppliers if they have already pledged their sales ledger leaving them with no current assets to pay creditors.

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Debt Collection & Credit Management Factoring, Invoice Discounting & Asset Finance General Rescue, Restructuring & Recovery

Factoring and Invoice Discounting: Be Wary of Hidden Fees

Factoring and invoice discounting (borrowing money against invoices) can be a helpful tool for funding the working capital of a business.
While it used to be regarded as a means of borrowing by businesses in financial difficulties, it is now a common source of finance for managing cash flow and has the additional benefit of imposing discipline on the collection of outstanding sales invoices.
The service charge fee is pre-agreed with the finance provider and generally relates to the level of service provided. Fees for factoring are generally at a higher rate of between 0.8% and 3%, than for invoice discounting because the factoring service charge includes debt collection.
However, hidden in the small print are usually contingency fees that can be triggered by a default. These fees are sufficiently large to justify some lenders looking for reasons to trigger them.
There are many examples of companies in financial difficulties where the factor or invoice discount provider pull the plug on a facility and collects in the outstanding debts to recover funds loaned as well as their retaining the default and recovery fees.
Typical default fee are 10% of the ledger held plus recovery fees which are generally not specified. Such is the scope for earning fees that advisers to lenders might be persuaded to recommend the exercising of rights under a default knowing that they, as advisers, can be paid out of the recovery fee clause as well as repaying their lender client the loan and default fee.
Such self interested behaviour may swell the coffers of lenders but it doesn’t help preserve businesses or improve the reputation of the finance community.

Categories
Banks, Lenders & Investors Factoring, Invoice Discounting & Asset Finance General Rescue, Restructuring & Recovery Turnaround Winding Up Petitions

A Frozen Bank Account Need Not be the End of a Business

If a bank takes action to freeze a company’s bank account it is an indication that the bank is nervous and under its bank facility terms and conditions has exercised its right to not release funds.
A bank’s behaviour is monitored by its facility people and triggering action to freeze does not imply any expression of judgement or opinion on the business itself.
There are two other circumstances that can trigger a bank account freeze.
The first is when a winding up petition is advertised in the London Gazette, which is a legal requirement before a petition can be heard in the High Court.  In this situation the bank is required to freeze the business account because the bank can be held to be liable for any funds paid out of the account.
A second situation that can trigger a bank account freeze is when there are not sufficient funds in the account, which makes it effectively frozen, even if it hasn’t been done formally by the bank.
It is most likely to happen because the company is not paying money into the account, possibly because its factoring company is not remitting funds to the bank.
A company’s relationship with its bank is aggravated if the company fails to take steps to deal with this situation, putting the bank in the embarrassing position of having to return cheques or direct debits.
Payment returns can also cost a company a great deal of money, adding to the pressure on its cash flow by charging fees but it also causes the bank to more actively monitor the account because the company’s directors are failing to manage it within the facility that has been agreed.
In a situation like this when there are insufficient funds but the bank account is not formally frozen, the directors need to take prompt action, including stopping the release of cheques, cancelling all standing orders and direct debits and taking control of the cash to manage all future payments. This creates a hiatus period during which cash is only released if there are sufficient funds.
During this hiatus period when survival is in jeopardy, directors must manage the company in the best interests of creditors. Payments are only made to meet ongoing costs and those crucial liabilities that need to be paid for to keep the business going.
If, however, the bank account has been formally frozen the directors can only make payments either with the bank’s approval or with an order from the courts.

Categories
Cash Flow & Forecasting Factoring, Invoice Discounting & Asset Finance General Insolvency Rescue, Restructuring & Recovery Turnaround

Cash is King When a Business is Facing Financial Pressure

A company can be said to be insolvent on any one of four tests: the cash flow test, balance sheet test (negative asset value), an unsatisfied judgement (usually a county court judgement) or an outstanding statutory demand.
Of these four, the most crucial is the cash flow test which looks at whether a company can pay its liabilities as and when they fall due where late payment of creditors indicates that a company is suffering cash flow problems.
Running out of cash is the cause of most business failures and it happens chiefly  for three reasons: the bank freezing the company account, a restriction in the company’s ability to draw down funds possibly due to the lack of available credit and thirdly, a sales ledger issue where the company can’t draw down funds from factoring either because invoices have not been logged, or because of declining sales, or overdue or disputed invoices.
If the company’s relationship with its bank is under pressure then the causes and effects must be examined. Banks generally would prefer not to close down businesses and only usually start to get tough if  a business consistently tests its overdraft limit, company cheques cannot be honoured and the business does not communicate or  provide sensible financial information if asked for.
It may be that the company is forced into an onerous factoring arrangement that will benefit the bank but can reduce funds available putting further pressure on cash flow.
If the sales ledger system is not being kept up to date accurately or there are issues with suppliers over invoices then the system needs to be looked at thoroughly and a more robust set-up may need to be put in place.
In terms of cash outflow, there are two main tensions that can result and they are the inability to pay outstanding bills and the inability to pay future bills. In this situation prioritising payments becomes essential.  This is critical if a company has decided it is insolvent because it must act in the best interests of its creditors and needs clear principles for making payments to avoid personal liability.
In these circumstances unless a company is familiar with this sort of situation it would be advisable to take advice from a specialist restructuring adviser, who will have a number of strategies available to help and it may be that at its core there is a viable business waiting to be unlocked.
A cash flow crisis is an alarm bell sounding that should indicate that the business needs to be properly assessed with experienced outside help.