Surviving the cash liquidity drought

This article looks at how the current economic crisis has affected the credit facilities available to small and medium-sized businesses and some of the tools available to help them take command of their cash flow.

Small and medium sized businesses in the UK make multiple international payments everyday. Sending and receiving overseas payments is a natural part of working life for any company that operates abroad but is an especially important part of cash flow for exporters. The majority of SMEs involved in international trade, however, would say that shrinking cash flow has been a difficult challenge since the credit crunch began nearly five years ago.

Increasing credit to small businesses has been a big priority for the British Government.  The dual realities of the recent double-dip recession and a renewal of the sovereign debt crisis in Europe have added to the challenge the Government faces in addressing the issue.

Recent research has also revealed that 30% of SMEs named credit availability as a concern, up from 27% last quarter and 23% in Q1 2012. Over half (55%) said credit was important to their business but only 24% applied for credit last quarter (both figures flat compared to the previous quarter). Only 14% of SMEs believe credit is easier to obtain now than a year ago – the lowest figure on record. 74% of SMEs who did apply for credit, however, were successful in obtaining it and of those, 78% found the process not very difficult. This indicates that continuing negative headlines about the lack of credit available may be affecting SME confidence in applying for it.

Importers and exporters are low on confidence, and the short-medium term future of the global market is very unpredictable. It’s a vicious circle: SME reticence in the marketplace will in turn lower macro-economic activity. As the economy emerges from recession, there is a danger SMEs won’t be able to meet demand because they are low on stock and supplies.

The question is: how can SMEs break the mould and resist this vicious circle? In this age of austerity, the business with cash is king. With this in mind, many businesses with international interests have been looking for new ways to help them take control of their finances. It is certainly possible for businesses, however small, to manage dwindling cash flows in an attempt to remain profitable and competitive, and there are solutions out there to help them do just that.

One thing SMEs can consider is whether or not their foreign exchange provider can extend FX lines that increase short-term cash flow. For example, Western Union Business Solutions has a credit team that helps us to assess a client’s business to see if we can offer transaction terms without requiring a down payment which can help avoid tied up liquidity.  While modest, this sort of solution does help clients, especially those who are waiting for invoices to be paid – something that is taking longer for many of our customers. They are not alone in facing this issue; according to a recent story in the Independent, SMEs in the UK are awaiting £35bn in late payments.[1]

Another avenue small business owners can explore when looking to protect cash flow is to examine their company’s exposure to foreign exchange volatility.  Fluctuating currency rates can clearly impact the cost of a receiving a payment from an overseas  customer and effectively managing this risk can assist them in protecting profit margins.

One tactic worth considering is the adoption of forward contracts. Small and medium-sized businesses can forward-book exchange rates to lock in prices and secure a set currency rate for international payments. This is a currency risk management tool that enables a company to secure a fixed exchange rate for the future so they can plan ahead knowing exactly how much a transaction will cost them in sterling. Payment settlement can be arranged on a flexible or fixed date and businesses have the option to draw down (pay as you go) at any time between booking and the end of the contract.  The ability to secure the rate helps mitigate foreign exchange risk, protects margin, and allows businesses to predict their cash flow more accurately. The ability to fix the rate for up to a year in advance also helps them budget and forecast for what is likely to be another bumpy year ahead.

Small businesses might also want to consider looking at alternatives to banks for some of their payment needs. A specialist provider can often offer a more tailored service for a small business, one that takes into account its uniqueness and specific needs – e.g. whether it receives multiple small payments abroad in a given quarter or a handful of larger payments spread throughout the year – and tailors a solution to fit those needs.

As any small business knows, credit facilities and healthy cash flows are essential requirements when making international payments. The economic outlook continues to be bleak and any tools that can help SMEs increase their liquidity, including and beyond those discussed above, are worth considering. Protecting cash flows is vital for any business; it can mean the difference between sinking and swimming.

This article has been prepared solely for informational purposes and does not purport to provide any financial, investment or professional advice. It does not in any way create binding obligations on Travelex Global Business Payments Limited, a Western Union Company. Travelex Global Business Payments Limited makes no representation, warranty or condition of any kind, expressed or implied, in this article


[1] Source: The Independent, 9 July 2012:

Topics: Credit Facilities, Finance, Loans, Payments, and Purchasing
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