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Outstanding debts on an SME’s balance sheet not only restrict the company’s cashflow but can also significantly reduce the amount of money that it can borrow. At a time of business uncertainty due to the coronavirus outbreak, what can business leaders do to secure much-needed investment? Ian Anderson, Chief Operating Officer of peer-to-peer lender ArchOver, looks at the options. 


SME’s reasons for business funding have changed course recently

Just a few weeks ago, many small business owners were contemplating expansion plans for the year ahead, and considering sourcing funding to fuel these ambitions. Now, many SMEs need to secure funding simply to stay afloat. 

Those who seek funding will often look first to their debtor books – the money owed to them by their customers – to unlock this funding. Indeed, we live in what the British Business Bank described in its Small Business Finance Markets 2018/19 report as “the world’s largest invoice finance market”, with “invoice finance… still the most commonly used product” amongst SMEs. 

Lenders have looked to trade debtors as a key source of security for generations – and for good reason. Aside from cash, the debtor book is almost always the most liquid asset on the balance sheet. In an event of default, which is increasingly likely during a crisis, it provides a lender with a relatively straightforward route to recouping its capital. Businesses that already have a favourable, well-prepared debtor book are more likely to secure reasonable funding terms. 


Debt does not age well

Whilst we at ArchOver are not a traditional invoice finance provider, we too look at the debtor books of prospective borrowers as a source of lending security and analyse potential recoverability rates. But they can tell us much more than this – debt does not age well and if clients aren’t paying to terms we must ask “why?” The answers can be illuminating. 

The original guidelines were first published in the Escalate newsletter, in February 2020, however they’re just as relevant today despite the rapidly changing business landscape:

  • Could it be bad management? ArchOver looks at a wide range of metrics when analysing lending propositions, but the bottom line is that we must ‘buy’ a business’s management to lend. We take a dim view of management teams that let debtor collections slip; this often indicates to us that other parts of the business will be similarly poorly managed. 
  • Is it that the goods or services being provided are poor or defective?
    This is an obvious red-flag to any lender, again prompting concerns about management and its control of the business as well as the collectability of the security. 
  • Is it late payment? This is viewed differently. Late payment is a deep-seated problem that plagues SMEs through no direct fault of management. In fact, it has been described by the National Chairman of the Federation of Small Businesses as their “biggest challenge.” The root cause is often a power imbalance between SMEs and their larger clients and it is enough of an issue to have attracted government attention. This overdue debt represents a drag on liquidity and pursuing it a huge time cost, detracting from the time available to simply manage the business. 

Late payment causes problems for lenders too, affecting borrowers’ cash flow and ability to make their scheduled payments. A willingness to engage with services like Escalate shows that a management team is pro-active in identifying problems and recognises the cost and distraction of chasing debts in house. As a lender, that’s the kind of clear headedness we like to see. 

There’s never been a more crucial time to prepare your balance sheet for lending, as cashflow is king right now. If you’d like more information or guidance on this, please contact Ian Anderson or Tom Mitchell at ArchOver on ian.anderson@archover.com or thomas.mitchell@archover.com. 


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