Go with the (Cash) Flow

However, he adds: “A stronger cash reserve helps the business sustain [itself] during times like the one we are witnessing now.”

Cash flow in the time of corona

Indeed, Stuart Donaldson, finance specialist and founder of business consultancy Banyan Co, elaborates that having a strong cash flow can be the “difference between survival and failure” for small businesses, especially when they face unexpected global events such as the coronavirus pandemic.

“SMEs must have cash reserves and access to funding if they are to endure this coronavirus crisis and position the business for recovery,” Mr Donaldson tells The Adviser.

“They need to have the buffer in order to be able to pay the bills, meet all their expenses and keep the doors open,” he explains.

Over the past few months, while the country has experienced a major shake-up due to closures of business premises and social distancing measures, small businesses have been nervously watching the total amount of money that is coming into their business from sales and balancing it against the amount going out (wages, rental costs, stock control etc).

They’ve also been hit with a further cash flow obstacle: changes to payment terms. A recent survey of 1,200 SME owners and senior finance staff by market analyst East & Partners on behalf of Scottish Pacific revealed that the average SME is waiting 56 days to be paid, and it is smaller businesses who are most affected.

GetCapital chief operating officer Frank Sterle reveals that he has seen business cash flow affected as their suppliers change the payment terms offered, consequently widening the working capital gap.

“If the supplier to a business suddenly says, ‘You need to pay me cash on delivery’, that can create a disruption,” Mr Sterle tells The Adviser.

“But a business that has cash availability will be able to handle that disruption much better than one that doesn’t.”

The impact of long payment times

Indeed, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) released the Supply Chain Finance Review final report in March, in which it uncovered a persistent trend of payment times extending beyond acceptable industry standards.

“Large businesses extending – or in some cases, suspending – payments to small businesses are on notice that this behaviour is unacceptable,” ASBFEO Kate Carnell said at the time.

When COVID-19 hit, Ms Carnell noted a surge in big businesses “using the COVID-19 crisis as an excuse for poor payment times”, in some cases by up to six months.

She therefore called on government to enshrine into law a 30-day payment standard, with maximum payment terms of 30 days from receipt of invoice from small businesses.

“Legislation requiring SMEs to be paid in 30 days is the only way to drive meaningful cultural change in business payment performance across the economy,” Ms Carnell said.

“Many small businesses have been forced to close their doors, and a lot may not survive the coming months, even with significant support from the government. That’s why it is more important than ever to ensure small businesses are paid on time,” she added.

The role of brokers and collaboration

While calls are being made to legislate for supply chain finance, the government is fast working on helping SMEs protect and manage their cash flow. The Boosting Cash Flow for Employers measure, for example, provides up to $25,000 back to business, with a minimum payment of $2,000 for eligible businesses. The tax-free payment hopes to provide temporary cash flow support to small and medium-sized businesses that employ staff.

A range of lending initiatives have also been rolled out to help lenders provide timely cash flow finance to SMEs (see page 25 for more) with many offering financial assistance to those impacted.

But while these packages are available, navigating them and understanding which lenders are open for business is even more difficult than ever. Brokers are therefore perfectly placed to harness this opportunity to assist businesses with their cash flow issues and simplify the various options for the business owner.

Prospa co-founder and chief revenue officer Beau Bertoli tells The Adviser that brokers should understand the increased need for a fast response and good customer service, especially during volatile times.

“Small-business owners are time-poor, wear a lot of hats, and must have been completely blindsided by the cash flow difficulties caused by COVID-19,” he says.

“With so many unknowns, small-business owners want a simple application and quick decision so they can make their next move, whatever that is.”

Kieran Gill, the director at non-bank lender Semper Capital, says that many brokers have been stepping up to the plate, noting that while there has been a progressive upswing of brokers in the commercial space over the past few years, this has particularly accelerated over recent months.

“Particularly at such times of uncertainty, we encourage brokers to go back to base and reach out to their business clients and really take the time to understand where they’re at with their cash flow and how working capital (or lack thereof) is affecting business,” Mr Gill tells The Adviser.

“There’s a tremendous opportunity for brokers, particularly in collaboration with accountants, to proactively conduct financial health checks for their clients and, by doing so, access cash flow holistically.

“This should include assessing credit levels, how to reduce the effects of bad debtors or invoice lags, plugging loose bookkeeping, and determining a management plan to reduce exposure and prime the business for growth,” he says.

Understanding the SME

Mr Gill suggests brokers could work with accountants to provide debt solutions to facilitate growth. For this, brokers need to sharpen their financial literacy skills, gain a comprehensive understanding of the business, and assess how much growth is sustainable for the business.

Brokers must familiarise themselves with financial statements to see a business’ “sins and opportunities”, according to Mr Gill.

Before assessing how much cash flow a business needs, brokers should assess what the premise of cash flow is and the function it is intended to perform, he adds.

“That is, the ability for a business to generate income over a certain period relative to expenditure. Question how a business might optimise cash flow and, accordingly, reduce exposure,” he says.

Forming relationships with lenders

If knowing the business is important for brokers servicing SME clients, knowing and forming relationships with lenders is equally important.

Mr Sterle says brokers and lenders who understand each other’s businesses will hold the upper hand.

“Brokers must have confidence that the lender has a strong balance sheet to support their clients through different economic environments,” he says.

Mr Gill echoes this point, and says once the broker has reached out to their SME clients to understand their cash flow position, understanding which lender will best support a client’s requirement is the second piece of the puzzle. But he acknowledged this can be overwhelming for brokers who are not familiar with this space.

“A good place to start is speaking to the lender’s BDM or going to your aggregator,” he says.

“Having said that, be wary that going with the lender you know may not always be the most aligned solution. Brokers who are committed to understanding ‘who’s who in the zoo’ will have the edge.”

Customised alternative finance solutions

According to Mr Donaldson, brokers are in a good position to help SMEs access finance, including through a range of alternative finance options, as they are independent and can access a panel of lenders.

“It’s their role to be across all the lenders and understand all of the funding packages that are out there,” he says.

“Depending on what the financial needs of the SME are, brokers can then select the funding facilities that best match the needs of their client, including all forms of short-term finance.”

Knowing the products

As a broker operating in the space, Mr Battula notes that there are a wide range of finance options available, each with specific needs – for example, debtor finance, equipment finance, lines of credit, bank overdrafts and both secured loans and unsecured loans from banks and alternative lenders.

“It is important for brokers to understand the various options available so that they can advise clients on the appropriate solution based on a specific need,” he says.

“For example, if an SME is in urgent need of funds, an unsecured loan from an alternative lender could be the best option since the funds could be made available in as little as 24 hours with minimal paperwork.

“Alternatively, if the SME is willing to pledge a security, a secured loan could be more feasible since the interest rates could come down significantly,” he says.

GetCapital offers three products specifically designed to help businesses with their cash flow, two of which are designed for more established businesses.

“For established businesses, brokers can choose either a revolving business overdraft or term loan,” Mr Sterle outlines.

“Linked to any bank transaction account, the overdraft gives the flexibility of only paying interest on funds used, beyond the initial six-month repayment deferral.

“For emerging businesses operating for less than three years, we offer a working capital facility under the scheme,” he adds.

As participants of the Coronavirus SME Guarantee Scheme (see page 25 for more), SME lenders Prospa and GetCapital are both offering specialised cash flow finance products that give SMEs the option to forgo repayments on their loans for the first six months.

Before writing a loan under the scheme, GetCapital’s Mr Sterle suggests that brokers first speak to the lenders’ BDMs to understand their credit appetites and which lender suits their clients.

“Some [lenders] have turnaround times that are long,” Mr Sterle says, “while some lenders have created new products specifically for this government-guaranteed scheme and may still be finding their feet with the actual products.”

He continues: “While the government backs 50 per cent of the loan, SMEs still need to qualify for the loan based on the lending criteria set by each lender.

“Brokers can assist clients with paperwork and submission of applications with the right lenders to improve the chances of approval.”

Word of warning

Mr Sterle, however, cautions against businesses applying for hardship to improve cash flow if they have not experienced any revenue damage due to the coronavirus pandemic.

He notes that some businesses may be contemplating turning off their repayments with lenders to increase their tax position if their revenue is affected.

“Many lenders won’t increase obligations to a business that has entered hardship, and this may impact its ability to obtain finance, for example, if a new equipment finance opportunity arose,” he says.

If a business applies for hardship, it indicates that it cannot meet its payment obligations and therefore cannot make its loan repayments.

“A lender would have to question whether it’s prudent to extend credit to a business that has gone into hardship,” he warns.

“If a borrower has said that they do not have the capacity to meet their current obligations, it can be hard for a lender to then say, ‘Let me give you a loan such as a car loan where you can make immediate repayments’,” he says.