By Thore Vestergaard, MD of Commercial Cards at Allstar Business Solutions.

The COVID-19 pandemic has dramatically changed the way many businesses operate. A great number have had to alter their business models to reach customers in new and innovative ways, while others have had to close completely and wait until the virus has subsided, before opening again.

The opportunity for the latter is now arising, as we emerge from lockdown and businesses are beginning to slowly reopen and customer demand gradually recovers. However, the problem that many companies are now facing is the need for cash to begin stepping up their operations, as it requires costly activities such as investing in new stock, getting vehicles back on the road, and restarting promotional activities. This is while they are not generating revenue to the extent it was before the crisis.

Used up cash deposits and finite government schemes

Throughout lockdown, many small to medium enterprises (SMEs) will have had to dip into their cash deposits to survive. Some may have depleted these deposits completely, as they have had little cash coming into the business over the past few months. What’s more, this financial pressure may continue for a while as economic recovery will be gradual and for some industries it could be 2021 before cashflow generating activities are restored to what they were pre-COVID-19.

Furthermore, many of the government schemes introduced to help SMEs during the pandemic were designed to help them stay afloat and are “artificial” cashflow fixes that do not contribute to resolving the problem in the long-term. These schemes include grants, the Job Retention Scheme, loans and deferred VAT, some of which will eventually need to be paid back.

In addition, companies are likely to face difficulty securing commercial loans from lenders during this period of economic difficulty, as many will be risk averse, making it increasingly difficult to restart business activities.

To help combat these issues, get back on their feet and avoid liquidation, SMEs must look at different ways to optimise cashflow. By delaying the time it takes for money to leave the business and accelerating the speed at which it comes in, businesses can start to replenish deposits, enabling them to focus on growth rather than survival.

Working with suppliers

Businesses can improve cashflow issues by working openly with suppliers and negotiating better terms. When doing this, it is best to start with high-volume suppliers to negotiate longer payment terms. In addition, it is useful to offer them something in return, so considering supplier aggregation is beneficial during this process.

Furthermore, paying suppliers using a payment card – where possible – will help maximise free credit periods, while also giving SMEs access to discounts, cash-back, better deals, and “early payment discounts” for ad-hoc payments away from their normal suppliers. Yet, when using this payment method, it is also important to remember the fees involved and to settle statements in full as interests can quickly outstrip benefits gained in the first place.

Catering to customers’ payment needs

As SMEs start to reopen, they also need to cater to the needs of loyal customers to keep them coming back and further boost revenue. Providing them with their preferred payment options and terms is essential when doing so.

Also, by offering early payment incentives, such as discounts, SMEs can collect payments quicker and reduce collection costs.

What’s more, giving customers who usually pay on invoice the ability to pay by card at point of sale is a great way to receive cash faster, while negotiating better rates with acquirers can further reduce the costs associated with accepting card payments, thus improving cashflow further.

Using financial products to stretch cashflow

It is essential that businesses also have low cost back-ups to primary working capital solutions. This gives them flexibility and helps them avoid expensive overdrafts and short-term loans when something unexpected happens – such as a large customer paying late.

It should not be assumed that a business’ current banking partner has the best offers for loans, credit and general payment services either. Shopping around and consulting experts can open up a world of new and exciting service providers that may be able to offer better and more cost-efficient services.

With that said, an SME’s existing bank may be most willing to offer free business charge cards, which generally give companies between 30 – 50 days free credit on purchases. It’s worth speaking with your current financial services providers and those further afield about such cards, which may also come with additional benefits, such as cash-back or discounts. Another benefit is charge cards must be paid back in full on the payment date which eliminates the risk of high credit fees as is the case with revolving credit products.

SMEs can also explore faster payments, which are offered by most banks at low cost allowing them to delay paying invoices right up until the payment due date, as these payments are processed in minutes.

SMEs must start acting

For businesses to make the best headway as we emerge from lockdown, they should consider implementing these changes as soon as possible. The reason that most businesses go into liquidation is not because they do not have a viable business, but because they run out of cash. This situation is easier prevented if they start working closely with suppliers, customers and ensuring they have the right financial tools in place to support them. By doing so, they can better ramp back up their business activities and begin planning for the future.