Most small businesses suffer problems with cashflow. It goes with the territory. It is written there, in big letters, when you sign in your own blood on the dotted line at the bottom of this Faustian pact to say that you want to run your own business: you will have cashflow problems.
In a recent survey of SMEs, managing cashflow was listed as the single biggest problem for 1 in 10 companies. Because I Like It Raw, a fruit and vegetable supplier from Glasgow, is one such company.
"We supply some big organisations like the NHS, but if they are late paying us we have no safety net, which causes us cashflow problems which has a knock on effect on our supplies," Andy Miller, the company's founder, says.
Such financial constraints have limited the company's ability to expand. "We could quite easily go after the big accounts, which are the ones needed to grow, but they ask for credit which we can't give them.
"It is extremely frustrating not being able to expand and push a great product and brand name to a national market."
But there are ways to ease such cashflow problems. One of the best methods is factoring, which allows a company to raise finance against its debtor book.
"With a traditional overdraft, a company might have to borrow money while it waits for the buyer to pay," Steve Bottomley, the head of Invoice Finance at HSBC says. "But with factoring, a company receives 85 per cent of the debt from the factor as soon as the invoice is raised. The remaining 15 per cent comes through, less the factor's charges, when the buyer pays.
"This process accelerates the trade cycle and offers more certainty. Companies know they will be paid immediately and they can use this cash to either invest in their business or pay off their own creditors early, making them eligible for early payment discounts."
Factoring companies also collect debt on behalf of their clients. This allows businesses more time to concentrate on expansion, product development and sales than chasing late payers. And because factoring companies have access to far more credit-reference information, they can give advice on which customers might represent a poor credit risk. This reduces the risk of bad debts and ensures a company does not waste time building relationships with financially unsound customers.
Factoring companies usually charge a percentage of the amount of funding provided and a turnover charge on the debt collection.
For an extra fee, most factoring companies also offer credit protection insurance. This means that if a debtor fails to pay after an allotted time the factoring company covers the invoice. Almost 90 per cent of companies that use factoring also buy credit protection cover.
Hamilton Laboratory Glass, a manufacturer of scientific glassware and instruments, is one small company using factoring to its advantage.
"When we started our customer base expanded quickly," Eric Bodley, the managing director, says. "But we soon ran into cashflow problems. Customers were late paying and our suppliers would not give us more credit. The bank wouldn't lend us any more money. Despite being a great business on paper, we were unable to trade.
"Then we started factoring, which provided us with the cash we needed to finance the trade cycle.
"The system is great because we just invoice our customers and then forget about it. It means we save a wage in the office because we don't need someone to chase payments. The scheme also allows us to pay our creditors on time, which means we get preferential treatment and can negotiate discounts.
"One additional benefit of factoring is that you are only ever spending within the parameters of the cash you have generated, which helps keep your finances in great shape."
Although factoring works for some companies it is not suitable or available to all businesses.
"Experience has taught us that factoring is not worthwhile or profitable for companies with sales of less than £100,000 a year," Mr Bottomley says.
"The industry also does not offer factoring to contractual businesses where it is not clear the point at which the product or service is finally delivered. For example, factoring would not be offered to construction companies because there might be an ongoing service contract or even disputes about faulty work that might need repairing before a bill is paid in full."
For more information on factoring visit the Factors and Discounters Association website. The Association is the representative body of the factoring industry and its website contains the contact details of all registered factoring companies in the UK.
