How is your business preparing for the triple threat?

Summer is upon us. As the days grow longer and the sun picks up, it’s easy to forget the doom and gloom of winter and look ahead to brighter days. But for many SMEs, even the lifting of crippling Coronavirus restrictions isn’t enough to guarantee financial stability, and with the triple threat of rising energy costs, tax, and inflation on the doorstep, now is the time for businesses to prepare for what’s to come.

Back in December, the Federation of Small Businesses described the UK’s national energy crisis as an ‘existential threat’ to SMEs.[1] Since then, the ONS has reported that 38% of UK businesses have 3 months or less of reserve cash.[2] It’s clear that the rising cost of energy requires solutions far beyond a simple switch in energy providers. And many of those businesses that are in danger of scraping the bottom of the cash barrel are among those fortunate enough to survive the crushing impacts of Brexit red tape and a global pandemic.

Since then, the ongoing Russian invasion of Ukraine has sparked further concerns about the steep rise in energy prices, which Boris Johnson claims is a repercussion of the economic sanctions being placed on Russia. As a result, inflation hit 9% in April 2022 – its highest rate since March 1992. If that wasn’t bad enough, the UK Government increased the National Insurance and income tax, creating the perfect storm for a cash flow vacuum in small businesses.

So how can SMEs possibly cope with this triple threat? Of course, there’s no such ‘one size fits all’ solution, but there are options available to business leaders who are concerned that they may not survive the coming months.

Perhaps the most widely recognised, traditional outside source of financing for businesses are bank loans. These can take many forms, from short notice working capital loans to cover emergency periods, to factoring loans – where a business borrows money owed by customers/ suppliers. Bank loans are not repayable on demand, and businesses can usually negotiate long repayment terms, giving them the time needed to build up their cash reserves. However, loans often come with eye-watering interest rates that are payable on funds even if you’re not using them. In some instances, businesses that are able to pay back a loan quicker than what was agreed with the bank may be locked into paying interest until the end of a fixed term, creating further drains in cash reserves.

SMEs facing acute pressures may also feel urgent action is required, and in these instances personal credit cards, director loans and other quick fixes can come into play. Many of these can provide a short term sticking plaster, but not mid to long term financial rigour, and of course compound the financial pressures on a business when it comes to balancing cash flow. Likewise, none of these will account for potential issues which could occur elsewhere in a company’s finances, such as late or defaulted payments on invoices. Barclays recently found that three in five SMEs in the UK regularly encounter late payments. When the company books are already being squeezed.

But there is another way – new alternative approaches emerging in this space which can take the pressure off. Take, for example, factoring loans – an approach that has been previously tarnished with

  • Complex terms and conditions
  • High rates of interest
  • Lengthy payment terms.

Things have come a long way, and the options now available to SMEs, such as AREX Markets, which is embedded into accounting softwares like Xero, are revolutionising SME access to financing.

Now, businesses are able to sell an invoice in 1-click. And gone are the days of lending the money from the bank – AREX works with a marketplace model, where investors can temporarily cover the cost of an invoice and make a profit on the return. Cash in the bank for the business and profit for the investor. It’s a win-win and with

  • No personal guarantees
  • No minimum invoice value
  • No rolling contract or minimum number of invoices
  • No need for additional insurance
  • No change of bank account

So what does it take for SMEs to access these solutions? Generally speaking, they need an accountant who understands their role is to be a financially savvy and literate advisor. The accounting tech industry is booming, and businesses should be riding this wave in order to prepare for the future. And while the number of emerging fintechs may seem daunting, centralised platforms like Xero are primed digital toolkits that accountants should be harnessing to make lives easier for them and the business.

As the triple threat looms large, business leaders looking to bridge the gap in cash flows have a choice. They can take the risk and stick to the traditional financing methods like bank loans, or they can lean on their accountant to explore new alternatives and de-risk their cash flow position with AREX.


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