FD Report: The weakest link - improving cash flow when credit is so hard to come by

Despite talk of the famous green shoots, credit is still very much under the crunch. The banks, having put the ‘Closed’ sign up on business lending (despite protestations to the contrary), are in no position to offer straight-up debt. Overdrafts are coming under review across the board, while the capital markets are convalescing too slowly from the seismic shocks of the autumn to offer much encouragement.

Which leaves many businesses squeezed. Credit is more expensive, while demand continues to lag. Indeed, it’s leaving many finance directors scratching their heads as to how best to secure funding. The number one headache? “Businesses are not paying on time,” says Philip King, chief executive of the Institute of Credit Management. “And there is a temptation to create cash flow by delaying payment, which is a problem for smaller businesses.”

Hence, the growth in alternative financing. The Asset Based Finance Association reported a 9% increase in their members’ revenues in the final quarter of 2008, proving that while banks are more cautious and selective when it comes to lending, businesses are busy looking elsewhere (or at least to the bankers’ specialist finance arms) to find the cash to keep the business going. “We’re seeing a greater hunger for alternative finance,” says King. “The banks would argue that they are lending, but we all know it’s less available.”

Breaking the link
The result is that bankruptcies will continue to rise as more smaller businesses go to the wall every week, increasing the risk of key links in the supply chain breaking.

Indeed, for many industries, the issue of single sourcing ­ relying on a small number of strategic suppliers for a particular piece of technology, say ­ is becoming a serious business risk.

“At the moment everyone’s talking about cash management and working capital,” says John Morris, Ernst & Young’s working capital partner. “And everyone’s looking at improving cash flow but they can’t get finance. Alongside that, consumer and business demand has fallen, so people are looking to defend their balance sheet and hit covenants.

Externally, businesses are looking to demonstrate cash flow even though earnings are falling.”