Government austerity measures are likely to have a severe impact on John Wilkes’ business, but he’s already planning for survival.

The biggest issue John Wilkes and his firm ANDS faces is the current cutbacks in the public sector. And while business is good at the moment, he’s  well aware that now’s the time to prepare for a downturn.

ANDS offers training and recruitment services to local authorities and their providers. “We tend to work in the areas such as land maintenance, waste management, low level IT and – which is our biggest areas – parking enforcement,” explains John. “When I tell people we recruit and train traffic wardens, we’re suddenly their least popular contact. But it is a vital part of how the country works.”

John’s business model is to sign long term contracts with local councils with an agreement to recruit and train a certain number of people per year, either in one specific area or across a range of different roles. While never the staff’s employer, ANDS is also responsible for performance measurement and ensuring the staffing levels remain at the required rate. “So we may have a contract to bring eight people on board a year, but if two of those leave within that year, it’s our role to replace them.”

The actual recruitment of people is not that difficult, says John, despite the reputation of many of the roles he recruits for. “Our main purpose is more on the administration side – most of the positions require criminal record checks, and we need to be very careful that those we do hire have the right to remain and work in the country. It’s also in our best interest to ensure they are genuinely keen to do the job, because the cost of replacing people also falls to us.”

Starting up

John started ANDS with two colleagues six years ago, when the local authority he was then working for decided to outsource the operations for his business. The trio would have either been made redundant or been transferred to a new employer, so they thought that with their knowledge of how the system worked, they should form a business and bid for it themselves. “The council was initially a bit unsure about using us – we’d done a good job for it but we were a new company. And while the first contract was small, it didn’t want anything to go wrong. It took us a long time to even convince them that we should be taken seriously. Even then, we didn’t get any preferential treatment, our bid was decided on its own merits and we were up against two other providers, each of whom had far more experience.” Fortunately, John’s business won the contract, and from that moment on, events moved at a rapid pace.

“All three of us had only worked in local government for our whole lives and we didn’t have any experience of running our own business, so it was a steep learning curve!”

Each partner put in an initial £20,000 to get the business started and agreed to defer salaries for three months. “Our start up costs weren’t that high,” explains John. “We already had the first contract so we would be working on that to start with, so we needed office space, IT and some funds to pay for recruitment and training costs.”

Even though its first client was a central London council, the new company felt that there was no need to pay the high commercial rents of central London and instead took a suite in a serviced office out in the suburbs.

“Taking an office in the centre of the city would have cost us at least a thousand pounds a week,” he says. “We now don’t even pay that a month.”

Once the first contract was up and running, the main priority for the company was to bring in additional business. “This first job was a good one, but it wasn’t enough to sustain the three of us in the long term,” explains John. “But we wanted to show that we were able to do a good job so we didn’t bid for anything else for the first six months so we could build up our reputation. Our timing proved to be good, as a number of tenders came up about five months after we started. We bid for all the ones we thought we could do, which numbered about 11 different contracts, and we managed to secure two of them. We were actually quite disappointed that this was all we got, but in the event it turned out for the best – we couldn’t have coped if we had any more.”

Since then, the business has grown steadily. With each contract lasting for an average of two years, the company has picked up a net average of three a year,
and now works for eight different local authorities on 15 different projects. The three founders are still part of the business, which has hired a further six full time staff as well as a number on short term or part time contracts for busy periods or when additional specialist skills are required.

“We’re not exactly millionaires,” says John, “but we’ve done pretty well and I’m happy with the way the business has developed. We’ve built ourselves a good reputation to the extent where we are now invited to tender for projects rather than having to push ourselves in. We’ve got good relationships with most of our
clients, and also with our suppliers, such as recruitment agencies and specialist training organisations.”

Finances

ANDS launched with a basic bank account from HSBC, and has never seen a need to switch. “We don’t see a lot of different payments go through, we are not a cash business and I can do almost everything with internet banking, so the actual bank charges are fairly irrelevant to us,” explains John.

One of the issues the company does face is late payment. “We only have a few clients, so if more than one wants to wait until the new financial year before paying us, it can really knock us out – this happens more than you think, there have been a couple of years when no-one has paid us until April!” The firm has an overdraft facility with HSBC for such an eventuality, though it has also built up reserves which, says John, can fund the business outright for three months. “Wherever possible we try not to use the overdraft because it can get expensive, but it’s a good safety net for if we ever need it.

The other key area for the company is insurance. “We’re an employer, so we have to have employers’ liability insurance, and we also protect our equipment with a contents policy. But because we operate recruitment and training schemes, there is the possibility of huge legal claims – we haven’t had anything of that nature, thankfully, but we make sure we have the right insurance policies in place if ever there was a claim.

The future

Government cuts could have a major impact on ANDS, but any impact is yet to be felt. “We know that local authorities are cutting services and freezing recruitment,” says John, “so we have to prepare for that.” Because the length of the average contract is so long, the company still has plenty of business but they are keeping control of expenses and looking for new avenues. “A year or so ago, we started looking at what we could offer the private sector – perhaps recruiting and training security guards or other, similar, levels of staffing. We also don’t do a lot of training for people who are already in employment and that’s an area we should explore.

“But really it’s about keeping the contracts we have and keeping the costs down. One of our staff is due to leave just before Christmas as she is moving away from the area, and we’ve taken the decision not to replace her straight away. We’re going to batten down the hatches and ride out the storm – it’s better to survive than try too hard and lose the business.”

The ‘Top 5 tips for reducing energy bills’ is brought to you in association with Make It Cheaper.

Make It Cheaper is the UK’s leading business price comparison and switching service, handling over 2,000 enquiries a week. It provides its customers with impartial, comprehensive and free information about overheads such as business electricity and business gas helping you to switch suppliers and making sure you are not caught out by the small print.

What many businesses are waking up to is that there is no such thing as customer loyalty with energy suppliers and by staying with one company from one year to the next you’ll end up paying higher rates. With 11,000 different business energy tariffs ranging threefold in price switching once a year is the only way to stick on the better rates. Here’s are some tips to help you.

Establish Contract Status

• Call your supplier to clarify your contract status, the unit price you’re paying and the date of your next renewal period. It’s actually better for a business to be in a contract than not. ‘Out-of-Contract’ rates are the highest rates you will ever pay. So, for example, if you’ve just taken over new premises but not contacted the suppliers, you will be clocking up a massive account.

Shop Around

• Don’t accept a new contract with your incumbent supplier until you’ve compared prices. If you don’t have time to call your existing supplier or potential new suppliers try a business price comparison service who can tell you immediately if your rates are competitive and if not, do the legwork of finding out which is the best deal for your business (based on postcode, credit score and consumption).

Check Renewal Dates

• Once on your on a contract, make a note of your renewal dates and what notice you need to give as many suppliers make it difficult to switch towards the end of a contract. Each supplier has different rules with renewal ‘windows’ closing long before the end date. Miss your window and you’ll automatically be ‘rolled over’ for a year on uncompetitive rates.

Serve Notice Regardless

• Not everyone has the time or patience to keep a track of when their contact is up for review. The best way to get around this is to send a notice letter irrespective of how long your contact has to run. You cannot be cut-off for doing this and given that your current supplier knows your switching intentions, they will be more inclined to offer you competitive rates at your renewal.

Sign-up For Help

• For those in any doubt about your existing contract(s) or just looking for an easy solution, Make It Cheaper offers a free contract checking service that deals with suppliers on your behalf and contacts you with the best rates available when it’s time to switch.

For more information please use our contact form and speak to Make It Cheaper today.

With so much focus on growth, all eyes are on small businesses to make it happen. The ability to find and acquire new customers is a key element in the growth process, but Experian’s research has identified this as one of the main areas of concern for small businesses.

Finding new customers can be a challenge, while finding profitable customers is another. However, businesses are operating in a riskier environment than they would have been used to in the early part of this century, and the biggest challenge today is finding customers that will continue to pay their bills.

Experian’s latest data on late paying businesses reveals the last two quarters of 2010 saw a deteriorating payment trend among businesses, while the first quarter of 2011 saw no signs of significant improvement as UK businesses continued to contend with challenging trading conditions.

While the largest businesses (500+ employees) remained the worst late payment culprits, smaller firms with three to ten employees – traditionally among the fastest payers – saw the biggest deterioration in payment performance as greater numbers struggled to pay their bills.

This highlights that the current threat of exposure to bad debt is a very real one. Businesses face reputational as well as financial risk when they target failing businesses. If you knew in advance that a potential customer wasn’t going to pay their invoice, would you still target that them? Would you still go after their business?

Small firms looking for new business clients should not simply target every potential prospect in their region without delving deeper into the impact those businesses could have on their own operations. Taking on the wrong kind of customers could have a negative effect on their own businesses and ultimately lead to its own demise.

While intelligent marketing information is still key to highlighting those prospects most likely to buy, credit risk information is just as important to show those that are most likely to pay. The financial losses and to failing businesses could well create a knock-on effect that causes their own business to fail.

Not every single business classed as risky will fail, as many will take some steps to change the path they going down.

So, the first step is to take them out of the equation. Through the use of marketing data that has been pre-screened against credit risk data, those unprofitable, high-risk businesses, including those that are likely to fail in the coming year, can be removed from an organisation’s databases and marketing prospect lists. This will enable small businesses to ensure their resources are more focused and effective. It will in turn reduce unnecessary expense marketing to unsuitable prospects and also help avoid the costs associated with expensive sales visits to small businesses that will end up proving costly in the long run.

However, while this can prove highly effective in avoiding the businesses most likely to fail within the next 12 months, it is only the first step. There is a more intelligent way of using pre-screened data.

Small businesses can use this data to delve deeper into the higher risk companies. By targeting them with payment terms and conditions that are more appropriate to them or by agreeing up front deposits before goods or services are despatched, businesses will be able to continue to take on new customers, but at lower risk.

It is worth bearing in mind that not every single business classed as risky will fail, as many will take some serious steps to change the path they are going down. By taking advice, reviewing current operations and adopting best practice, some of these struggling companies will manage to turn their fortunes around. However, until the business does turn itself around, it is still a risky prospect.

If the status of a high risk business later changes and it begins to grow, it could become a profitable customer in the future. Experian’s analysis shows that there is a lesson for all firms in terms of creating and enforcing robust credit management and collection policies so that companies do not leave payment to chance. Goodwill goes a long way in business relationships, but ultimately firms need to pick up the money that they are owed promptly or they risk encountering serious cash flow issues.

Content Source: Simon Streat. Managing Director of SME, Experian UK&I

Getting paid for your services can have a real impact on your cashflow. But help is at hand.

Invoice finance, also known as factoring or ‘debt factoring’ – involves selling your invoices to a third party. In return they will process the invoices and allow you to draw funds against the money owed to your business. Essentially, these companies provide a finance, debt collection and ledger management service.

It is commonly used by businesses to improve cashflow but can also be used to reduce administration overheads. Businesses that supply this service are called factors or debt factoring companies. Invoice discounting is an alternative way of drawing money against your invoices.

However, your business retains control over the administration of your sales ledger. As well as providing finance, it offers valuable support services and credit insurance.

This guide gives information on how factoring and invoice discounting work, the advantages and disadvantages, different types of factoring and invoice discounting, the cost, and how to choose a factor or discounter.

How factoring works

Factoring provides a fast prepayment against your sales ledger. It allows you, at a cost, to flexibly increase your working capital and improve cashflow.

Factoring is offered to businesses trading with other businesses on credit terms. It is not normally available to retailers or to cash traders.

When factoring starts

Factors can be independent, or subsidiaries of major banks and financial institutions. Whatever their background, they will want to meet you, visit your business, review your financial situation and study your business plan to evaluate your suitability for a factoring facility.

Credit limits might be required – if so, you must agree how they will operate. After signing an agreement, the factor will typically agree to advance up to 85 per cent of approved invoices. Payment is usually made available within 24 hours.

Usually all sales go through the factor. Check the notice period to the end of the service – most factors require three months’ notice, but some require longer. Negotiate if you are not happy with the notice period.

Factoring is a complex, long-term agreement. It is advisable to consult your solicitor on the legal and financial implications of factoring.

When an invoice is raised

• You raise an invoice, which has instructions to pay the factor directly and send it to the customer. Send a copy of the invoice to the factor.

• The factor makes available an agreed percentage of the invoice for you to draw as you require.

• The factor issues statements to the customer on your behalf. It operates credit control procedures including telephoning the customer if necessary.

• When an invoice is paid by the customer.

• The customer should pay 100 percent of the invoice directly to the factor.

• The factor pays the balance of the invoice to you.

When an invoice is not paid

If an invoice is not paid, responsibility for paying the debt will depend on the type of agreement – either recourse factoring or non-recourse factoring.

Charges

The agreed factoring fee is taken when the invoice is received by the factor. The discount charge works like interest and is calculated against the balance of funds drawn and usually applied on a monthly basis.

There are numerous advantages to factoring, but also some drawbacks.

Advantages

• Factoring provides a large and quick boost to cashflow. This may be very valuable for businesses that are short of working capital. A business that is owed £500,000 may be able to get £400,000 or more in just a few days.

• There are many factoring companies, so prices are usually competitive.

• It can be a cost-effective way of outsourcing your sales ledger while freeing up your time to manage the business.

• It assists smoother cashflow and financial planning.

• Some customers may respect factors and pay more quickly.

• Factors may give you useful information about the credit standing of your customers and they can help you to negotiate better terms with your suppliers.

• Factors can prove an excellent strategic – as well as financial – resource when planning business growth.

• You will be protected from bad debts if you choose non-recourse.

• Cash is released as soon as orders are invoiced and is available for capital investment and funding of your next orders.

• Factors will credit check your customers and can help your business trade with better quality customers and improved debtor spread.

Disadvantages

• Queries and disputes may have to be referred on and may have a negative impact on your available funding. For this reason, factoring works best when a business is efficient and there are few disputes and queries.

• The cost will mean a reduction in your profit margin on each order or service fulfillment.

• It may reduce the scope for other borrowing – book debts will not be available as security.

• Factors will restrict funding against poor quality debtors or poor debtor spread, so you will need to manage these funding fluctuations.

• It may be difficult to end an arrangement with a factor as you will have to pay off any money they have advanced you on invoices if the customer has not paid them yet.

• Some customers may prefer to deal directly with you.

• How the factor deals with your customers will affect what your customers think of you. Make sure you use a reputable company that will not damage your reputation.

• You have to pay extra to remove your liability for bad debtors.

Suitability

Your business may be suitable for factoring and will benefit most if it has:

• An annual turnover of at least £50,000, although some factors will consider start-ups and smaller businesses.

• A good spread of customers – there  may be funding restrictions if a single customer accounts for more than about a third of turnover

• Simple, non contractual debt that is easily proven.

• Low levels of debt more than 90 days overdue.

Your business may not be suitable for factoring if it:

• Sells to the public – factoring is only available for sales to commercial customers.

• Has too many small invoices.

• Has too many disputes and queries.

• is not a sound, reputable and trustworthy business.

• Has customers that make part payments or stage payments.

• Has complex contractual arrangement or warranty provisions.

Recourse factoring

In recourse factoring, the factor does not take on the risk of bad debts. Put another way, the factor will be able to reclaim their money from you if the customer does not pay. The factoring agreement will specify how many days after the due date for payment you must refund the advance. Whether you refund the advance or not, you will still have to pay the fee and interest.

Recourse factoring is cheaper than nonrecourse factoring and may have fewer requirements concerning your customers and your systems. This is because you are taking the bad debt risk. For example:

The factoring agreement requires payment to be made within no more than three months. It also states that 80 per cent of each invoice will be advanced.

On 30 April an invoice for £10,000 is issued and the factor advances £8,000. On 31 July, if the customer has not paid, £8,000 must be repaid to the factor. There is no refund of the factoring fees.

Non-recourse factoring

In non-recourse factoring, the factor takes on the bad debt risk. It accepts specified risks around the debtor’s failure to pay, but it does not insure against debts that are unpaid because of genuine disputes. Because of this, non-recourse factoring will be more expensive than recourse factoring.

You never have to refund the advance to the factor, but you must pay interest to the factor for any advance against the invoice for the period prior to the bad debt payment being made.

The factor takes over all rights to pursue the customer for payment. This includes the right to take legal action.

John Sollars is now on his third business; Stinkyink.com an online superstore selling printer ink cartridges for every make and model of printer in the market.

But this wasn’t his first step into the world of business. “My first business was a retail shop in Kidderminster that I set up in 1982,” says John. “It sold CB radios and electronic equipment. I closed it down because it just wasn’t making enough money.

“My second business was based in Wrexham and we subcontracted electronic assemblies – we went out of business, which was a tough time and definitely not to be recommended!”

John Sollars started Stinkyink.com in 2002. He recalls that, “It was down to my kids in a way – my daughter said that everything was going to be online very soon and it was the business to get in.

Then my son needed a new cartridge for his printer – I went to every superstore and none of them had the right one. So that’s when I decided to get involved.

“There was never any doubt in my mind that it would succeed – even though my son described the business as selling a product I know nothing about through a medium I know nothing about.

“I financed the business by remortgaging my house, and using my credit cards and overdraft. My previous experience is that the banks aren’t your friends and if you can run a business based on a set overdraft, you can equally easily run it based on a zero overdraft facility. I hate debt, it’s a core philosophy of my business. “

Because of his lack of technical knowledge it was important to find the right web experts who would hold his hand. He chose Teclan, the internet retail specialists who built the initial website using Actinic ecommerce software. “Actinic has been the bedrock of my business for the last nine years and has enabled me to grow to where I am today,” John declares, adding, “The guys at Teclan were a big help when I was starting up; they even sent down a chap from Slough up to Shropshire to train me so I could maintain the site myself. And now they still do the hosting and always respond magnificently if we have a query.

“I got started by creating a printer and cartridge database and sourcing suppliers – our first order was taken on January 22nd, 2002.”

Fraud almost stops play

However, within weeks of launching the website he became the target of a ring of fraudsters based not in Nigeria or Russia, but all over the UK, and the police could do nothing to catch them or get his stock back.

These were early days for online trading and the problem that John found was that he didn’t know which transactions were fraudulent and which were legitimate. It meant he had to refund virtually everyone who had placed an order.

“The fraud we suffered was a big issue for several years. In August 2002, when we had been in business for only a few months, our card processor said there were a number of fraudulent transactions going through our business. We ended up having to refund almost every order we had received – around £32,000 worth.”

On the verge of bankruptcy John remembers that, “Early in September 2002 I was sitting with my dog in the office at home when the full enormity of what had happened sunk in. I had to make a decision whether to bother going on, or to get out and go back to a ‘proper’ job. But I picked myself up, resolved not to trust anything or anyone in future and got on with it.”

Nowadays Stinkyink.com has protection because Actinic’s software incorporates The 3rd Man anti-fraud screening service that claims to detect around 97 per cent of all bogus orders. It takes the headache out of manual checking, gives John peace of mind and saves charge-back costs. “Since we started using 3rd Man, we have had less than £1,500 in chargebacks.”Indeed, John’s security is now so good that he recently helped the BBC with an investigation into online fraud.

Then he had another knock: In March 2005 the alarmed and barred warehouse he’d just moved to was burgled and his whole stock worth £50,000 disappeared.

As a ‘commercial’ incident the police were again not interested despite the value of the products, and it was fortunate that everything was fully insured. “The insurance worked really well and we were able to replace our stock quickly. But I didn’t realise we weren’t covered for our office equipment.”

John fought back from these calamities. Using email marketing and search optimisation, he grew the customer base and website traffic so within two years was in profit – a remarkable achievement. John recalls how tough the early years were:

“The fraud issue really coloured the first four years of the business as it made it hard to get credit with suppliers as our balance sheet was so weak. It taught me the importance of having cash in the bank and watching my P&L like a hawk – I review it every month.”

Back office savings

A major reason for the success of the business has been the MD’s attitude towards combining efficiency and quality of service. John is a passionate believer in both and has invested significantly in streamlining the back office systems using axisfirst software as well as attaining accreditations from Investors in People and the ISO 9001:2008 kite mark.

John explains, “In 2009 sales were 70 per cent up on the previous year and growing rapidly. We are a high volume, low margin business and keeping overheads down is crucial. We were struggling with manual, un-integrated systems for warehousing, purchase orders, accounting and order processing.

“As a result of automating many tasks and integrating everything, the overall efficiency of the company increased by over 40 per cent in 2010; net profit grew by 22 per cent; and as our turnover has increased our stock has decreased, improving cashflow.”

Repeat business is up

John’s other focus is his customers, “Customer service is the crux of our business and having ISO9001:2008 we make sure that whenever we can we implement any customer feedback to improve the site or our processes.

“I want to provide, or exceed the sort of service that I expect when I shop online so if an order is hanging around after 24 hours I get really cross. I believe that we provide an exceptional service with free next day delivery and a no-quibble warranty, even freepost labels for recycling old cartridges.

Our efforts are definitely paying off as half our orders are now repeats.”

What next?

All this has released cash back into the business and John has been able to invest in further IT upgrades as well as developing a new, niche web store – WattLamps – that holds no stock but instead utilises electronic data interfaces (EDI) and suppliers’ feeds to create an extension to Stinkyink’s warehouse.

And looking ahead John is already planning further ventures: “Using the existing back office resources coupled with the knowledge my staff have built up, we can dominate new niche areas as the opportunities arise – all with minimal extra overheads: it’s brilliant! It’s difficult to say what’s going to happen in the future – no one knows what’s going to happen in five years.

“The market is likely to vanish as quickly as it appeared.”

The 5 reasons to consider this finance method are as follows;

• Cars will lose money over time

Investing your hard earned cash in an asset, that will always reduce in value, may not be the most cost effective thing to do. Cash flow is vital in todays’ market so don’t tie up all your cash in a vehicle that’s losing value the minute you drive off the dealer’s forecourt.

• Fixed cost motoring

Contact hire leasing is a fixed cost motoring scheme. All you pay is a monthly rental that covers the finance, depreciation, maintenance and your road fund licence – then just hand it back at the end of the contract. All you need to do is insure it and fuel it.

• Leasing companies recover VAT  on purchase price

When a vehicle leasing company buys your car, they recover the VAT on the purchase price. The reduced amount of capital to finance is then passed onto you in a lower rental to pay. (Please note there are VAT recovery restrictions on the VAT added to the finance element of the monthly rental – only 50% of the VAT can be recovered. If you are not VAT registered then no VAT can be recovered and you will be paying the rental plus the VAT).

• More expensive cars can cost less  on contract hire leasing

This is due to the fact that vehicle leasing companies set resale values (residual values) on their vehicles and some cars depreciate more quickly than others. German cars for example, tend to have strong residual values and hence also tend to have lower contract hire rentals than other comparable cars from other manufacturers (in terms of the cost price).

• Compare contract hire prices

If you are a small business running a fleet of say three vehicle, leasing or buying a car is a really big decision for your business. Make sure you shop around and also compare lease prices on a like for like basis, to ensure you get the right car (or van) at the right price for you.

A new report, “The year ahead: a view from Britain’s small businesses”, published by Barclays Business in conjunction with Kingston University Small Business Research Centre, reveals the views of owner-managers in key areas including ambition and optimism for the year head, planned growth, areas for investments and employment plans.

According to the report, two thirds (66 per cent) of owner-managers are expecting to grow in 2011, with positive action being taken in areas that include entering new markets (35 per cent) and strengthening existing client relationships to potentially increase sales and improve credit management conditions (34 per cent).

The research also suggests that despite the challenging economic conditions, SMEs are still planning to invest next year, although they are being increasingly strategic about where they invest their cash, focusing on where it will have maximum impact.

For example, nearly half (43 per cent) are looking to up spend on marketing to increase sales, whilst almost a quarter hope to increase spend on product development and innovation. Two thirds (66 per cent) intend to at least maintain their investment in innovation, underlining the forward thinking mindset of the country’s owner-managers.

Commenting on the findings, Travers Clarke-Walker, a director at Barclays Business, said: “The importance of SMEs has been acknowledged for some time, but never more so than at now, with their performance forming a central component of the recovery, its speed and outcome. “The research reveals that owner managers have been actively managing their businesses to reposition themselves for survival and growth in 2011.

This is far from the alternatives of retrenching, cutting prices and reducing their profits; strategies that are unsustainable and only add further to any downturn in the economy. In addition, the fact that SME are seeking to grow and to enhance their profitability suggests a sense of optimism and a stepping up to the challenge of recovery.”

Professor Robert Blackburn, Small Business Research Centre, Kingston University, continued: “Our analysis shows that SMEs are able to make a significant contribution to the economy in terms of their employment, sales and innovation activities. Thus the emphasis by the Coalition Government on the central role of SMEs and the economy is not misplaced, as these firms have the potential to meet the expectations that the government has for them during the recovery.

“However, it is worth noting that whilst owner-managers are proactive in terms of planning for survival, development and growth, their success is partly dependant on the level of demand in the economy for their goods and services. Government supply-side measures, including the increased provision of finance, appear to be less popular amongst owner-managers
than stimulating demand for goods and services.”

So while SMEs are planning for growth, is the funding to support them out there? A recent Government report has highlighted how the banking sector has not been able to address the requirements of small businesses. The report, Competition and Choice in Retail Banking, found that the lack of branches, as well as a reduction in funding, was making it more difficult for
SMEs to access services – most importantly loans and other forms of credit.

The report noted that the debate on SME banking has too often only been focused on the availability and cost of credit. Good customer service for SMEs can be as, or even more, important to SMEs.

Competition and the ability to switch is the most important spur to better service. However, it’s not all bad news. Britain’s biggest banks – along with smaller providers such as Aldermore and Bank of Cyprus – are making a concerted effort to get funding out to SMEs.

RBS, for example, has joined the Community Development Finance Association (cdfa) to help make finance more accessible for the small grass roots businesses that are vital to local communities. Whilst the businesses themselves might be small, the sector is growing rapidly. Last year the cdfa increased lending by a record 77 per cent, with applications for credit now approaching £500 million.

Bernie Morgan, chief executive of the cdfa, said: “The CDFI sector takes a huge step forward today with this initiative. Change Matters will provide CDFIs with the tools they need to develop their business and attract a wider range of investors than ever before.”

Peter Ibbetson, small business chairman, RBS, said: “It’s vital all businesses, however small, get the help they need to thrive. This initiative will make a huge difference for those businesses that normally fall outside of mainstream lending.” RBS will also be providing funds to help finance the operational changes required to build the CDFIs capacity to increase
support to the sector.

Meanwhile, Santander (which does a lot of SME business through the RBS branches it purchased) plans to increase gross SME lending by 25 per cent and total lending to UK businesses by 12 per cent to support economic recovery. Santander has agreed to deliver £6.7 billion of gross new lending commitments to support UK businesses this year, following direct negotiations with the Government. Of this, almost £4 billion will be used to support small to medium enterprises (SMEs). This represents an increase of 25 per cent for SME lending and of 12 per cent for its total business lending.

Ana Botín, chief executive, Santander UK, said: “We are fully behind the government’s growth agenda and focus on supporting SMEs. Our objective is to continue to increase the number of businesses we work with. “Santander will continue to increase its lending to SMEs and its market share, as it has done for the past two years. The bank has very much been ‘open for business’ throughout the economic downturn, delivering £6 billion in gross lending to UK businesses, including £3.2 billion to SMEs, in 2010.”

In the current economic climate, banks are much more cautious about lending money – start ups without a track record, for example, are unlikely to get far.

• Term

Loan terms can be anything from just a few hours to a million years, yet the likelihood is that with a business loan you will be looking at between one and 10 years for repayment.

It’s fairly simple: the longer the term, the lower your monthly – or quarterly or annual or whatever – payment will be. But the shorter the term, the less you will pay in total interest. If for example you borrowed £1,000 at 10 per cent interest for a year, you will repay a total of £1,100 within that year, because 10 per cent of £1,000 is £100.

But if you borrowed the same amount at the same rate over two years, the interest you have to pay will almost double because the interest is an annual rate so you will be paying it for longer. It’s not exactly double because you will have paid back some of the capital in the first year, but it’s easy to see how the amount you have to pay adds up.

• Flexible

Some loans are flexible, which give you added freedom to let your loan run with the ebbs and flows of your business. Mostly, a flexible loan means you have the ability to make extra payments on top of the regular debit to pay off the loan earlier, but some will allow you to borrow back, take payment breaks and so on.

These can be particularly useful for businesses with a seasonal income – for example a farmer who earns most of his money just after harvest or a shopkeeper who relies on Christmas for profits and has a quiet period in the New Year.

• Security

In some cases, your bank may ask for security for the loan. This usually takes the form of property, though it can be anything of value – an investment portfolio, your stock, vehicles or even livestock (though that’s unlikely). This means that in the event you are unable to repay the debt, the lender has the right to take possession of that security to get its money back.

If you are a business that owns property, it’s fairly straight forward – you put up that property as security and you get the funds you need. But a high proportion of businesses don’t have large assets that they can use as security, and in this case a personal security may be requested, in most cases the owner’s home.

This means that if your business – even if it is a limited company – fails to meet its repayments, the bank will have the authority to collect from your personal possessions.

It’s always worth taking independent advice when you’re considering using personal assets as security for a loan. It’s a sad fact that many businesses do fail, and if yours was one of the unfortunate ones that went under, you wouldn’t want to be responsible for all the upheaval your family will face as well through losing their home.

In addition, the situation could be about to get a lot worse if the Coalition Government repeals Darling’s 2010 Budget pledge and increases the Government’s payment terms on invoices from five to 30 days.

The former Chancellor’s promise that the Government would pay 80 percent of its invoices from small business within five days was announced in March 2010 with the aim of assisting the cash flow of small businesses.

However, in the last few weeks, much debate has arisen around whether this is sustainable with Sir Philip Green, retail magnate and author of the Government’s Efficiency Review, suggesting the Government adopt the standard 30-day payment period that most private sector companies adhere to, thus saving the Government millions of pounds.

If the Coalition follows Sir Philip’s recommendation, it could be more salt in the wound for thousands of small businesses who supply the Government with products and services. Owners and managers will no longer be able to rely on timely payment from the Government and this, coupled with chasing for late payment from other clients, could bring firms’ cash flows to an abrupt halt.

Bibby Financial Services’ own research reveals that firms are already pouring money down the drain chasing late payment and this could be costing the small business community as much as £1.9 billion a year.

The scale of the problem has been escalating with 35 percent of businesses finding customers are taking longer to pay invoices than 12 months ago and 48,000 firms claiming they chase invoices more than 11 times.

In terms of time spent pursuing nonpayers, around 336,000 businesses spend three days or more per month chasing payment – time that could be ploughed into growing the business and seizing new opportunities, if only customers paid up on time.

Some sectors suffer more than others, with 47 per cent of manufacturing and construction firms saying that customers are taking longer to pay than a year ago, compared to 36 per cent of firms in business services.

Recent research from Bacs shows that a massive 769,000 companies are affected by late payment and that the total amount of money owed to these companies is now nearly a third more (28 per cent) than it was six months previously – £32,000 compared with £25,000. This means a massive £24.6 billion is currently owed to British firms.

The tide must be stemmed as  businesses cannot keep stalling payment and expect it to have no consequence. Across this nation, many firms are fighting for survival and the UK business community has a mutual responsibility to do everything possible not to succumb to the easy route of late payment. This can become a vicious circle which halts the purchasing cycle and, ultimately, can disrupt the supply chain, not to mention the impact on the goodwill and trust of other customers and suppliers.

For more than two in five businesses (43 per cent) the biggest outcome of late payment is an inability to pay suppliers. For a third (34 per cent) it results in recruitment freezes and for 30 per cent it means a staff salary freeze.

Bibby Financial Services’ research also reveals the costly lengths to which businesses go to bridge the problem of late payment. One in five (18 per cent) rely on a bank overdraft, whether it be business or personal; nearly one in 10 (nine per cent) resort to asking family members for a loan and almost five per cent will use personal savings.

In an attempt to combat the cycle, the UK’s major business organisations including British Chambers of Commerce, Confederation of British Industry and Federation of Small Businesses, launched the Prompt Payment Code in December 2008, a code to encourage companies to pay their suppliers promptly and within agreed timescales. Signing up to and implementing the principles in the code is a good first step for businesses to take and to encourage their clients to also adopt.

In addition, there are a number of other solutions for dealing with late payment and freeing up cash flow. Invoice finance enables businesses to unlock the funds tied up in outstanding customer invoices, leading to an immediate cash injection and ongoing supply of funds into the business. On receipt of an invoice from a client, the invoice financier will release a percentage of an invoice’s value within 24 hours bridging the gap between raising an invoice and getting paid.

This cash flow can then be used to settle suppliers’ bills more quickly, enabling businesses to benefit from early payment discounts. Furthermore, as the money advanced to the business is based on actual sales, the amount of cash available increases as the business grows.

In addition to this, the Invoice Financier can also provide credit control and collection services on behalf of its client, sending out statements and chasing the debt until it is paid, saving businesses valuable management time.

More than 40,000 businesses across the UK already use invoice finance to support them at various stages in their business life cycle and it is becoming increasingly popular in the current economic climate as many banks are either imposing strict lending criteria on small businesses or turning down their funding requests outright.

While getting paid is an issue that plagues thousands of businesses, it doesn’t have to spell the end for UK SMEs. With healthy finance structures in place and a commitment to best practice, late payment and faltering cash flow could be made a thing of the past.

The Real Cleaning Company was launched in June 1998, with little more than a good idea and a commitment to doing some hard work, according to its founder and managing director Howard Ashcroft.

“The original idea was to subcontract work from my brother, Richard,” explains Ashcroft. “He already had a successful cleaning business, so I borrowed £4,000 from my dad to set myself up.”

Unfortunately, this didn’t go quite according to plan. Disputes over the amount of work he was getting and the payments for it meant the siblings fell out. “I was left with nothing – all the contracts were his, and I was left to cleaning friends’ flats. I was going to go back and try and get a job in the hospitality industry, where I had come from.”

Then by chance, Ashcroft received a phone call that was meant for his brother – one of his clients had some work that had come up cleaning a shop that had recently been refurbished.

“The client thought I was Richard and simply asked if I could do the job. I kept up the pretence, said yes, and the rest is history!”

This client became Ashcroft’s first direct customer, and the work started to flow for him. And while his firm does carry out a vast range of cleaning services, shop cleaning – after refit or refurbishment – is its speciality.

The company now operates across the UK, and employs over a dozen full time staff, as well as many more on a job-by-job basis.

“In our first year, we turned over £15,000,” says Ashcroft. “In September this year, we reached almost £100,000 for that month alone.” With a number of clients, including shopfitters for the likes of Carphone Warehouse, business looks good.

The toughest part of the job is in planning the work, explains Ashcroft. “It’s seven days a week, 24 hours a day. Jobs come in all the time, and they change all the time – if a tradesperson lets down the shopfitter, they get delayed, which means we get delayed. There are lots of postponements and cancellations.”

“We’re in a very busy period with around 25 projects a week, so we need to stay organised – it’s just my wife and I organising the office, though we’ve just taken on someone to help us. And it’s hard work – the average day is around 14 hours.”

But it hasn’t always been that way.

The downturn

Like many SMEs, Ashcroft’s business started to struggle during the recession. “We almost lost everything last year, we had to cut our prices by 25-30 per cent,” he explains. “We’d always prided ourselves on being a top-quality company, and our prices reflected that. But the top end completely disappeared.

“But it’s been the making of us. We had to think really clearly about how to keep up our levels of service, but at the same time keep our costs down. This has meant planning the jobs better, keeping staff costs down, and being more efficient in everything we do.”

So with a turnover of £380,000 in 2009, and a tough first five months of this year, the Real Cleaning Company expects to turn over around £600,000 this year.

Banking

And all of this was done with very little finance. Although Ashcroft started out with a family loan, he resisted bank finance until he was three or four years into the business, when he took out a bank loan for £10,000 to improve his inventory and equipment. “Never again, it took me five years to pay it back!”

The company also managed to run up a large overdraft, up to £25,000 at one stage, but this has also now disappeared, which means that apart from finance on one of his vehicles, the company is now debt free.

And having banked with Natwest ever since the company launched, Ashcroft is now in the process of switching his business to RBS. “The division I am moving to has just been bought by Santander,” he explains. “We’ve had a recommendation about the bank’s business manager from one of our sub-contractors – he’s apparently very proactive and works solely with companies of our size, and has fewer clients to look after. This means that hopefully we’ll have a more personal service.”

The company also uses an invoice financing provider, to manage its cashflow. “When we start The next step At the moment, says Ashcroft, the company is so busy it has having to turn away business. “It’s very frustrating, knowing that the work is out there, but we are at capacity at the moment. This does give me confidence, though, to rack up the scale of our business.”

Ashcroft has ambitious plans. At the moment, he’s working with a software developer to automate the planning of jobs, which he says will make the business much more efficient. He’s also looking to take his company to the next level, with the possibility of him exiting in the next two or three years. “I’ve been meeting a lot of successful people who have been bought out by venture capitalists,” he explains.

“I’m now looking for an investor who can bring some commercial experience to our operation, as well as taking on a stake in the company.”

The plan, says Ashcroft, is to either sell completely in the near future, or put in place a management team that can run the business while he moves on.

“I’ve been in this business for 13 years and know it inside-out,” he says. “But I don’t want to be running it for ever. I will either sell, or leave it to others to manage and earn an income from it.

“But I’m not just going to retire – I’m the sort of person that has to work all the time. So I’ll move into the hospitality business, maybe a hotel or a restaurant/bar, maybe the events business.

Lessons learned

“I made so many mistakes,” says Ashcroft. “If I could go back to my earlier self, I’d say never think I know it all. I nearly lost the business on three occasions and it has been very difficult. At one stage, I was trying to make the business something that the market wouldn’t allow, and that’s the wrong way to go about things.

“Because of the recession, we had to change the format. we had to change the idea of the company to survive.

“Our success is in making it work. We still offer a high quality service and we do a fantastic job. I like to say that we started out as the Gucci of cleaning, and now we’re the Ikea – still great quality, but without so many of the frills.”

Sibling rivalry

And finally, has he made up with his brother? “He’s my best friend now, though I’m not sure if I’m his!

“We’re very different people, but we get on well – I did rub it in a bit, though, when my profit was bigger than his turnover last month!”