How to boost your SME’s financial health

Given the volatile economic landscape we’re enduring right now, small and medium-sized enterprises (SMEs) are having to deal with mounting financial pressures. From rising interest rates to tightening lending criteria — not to mention unpredictable cash flow — SMEs are looking at new strategies to try and stay afloat. Could adopting financial tools like payables finance help build resilience and support your business’s long-term stability?

Economic pressures continue to hamstring SMEs

SMEs really are getting the short end of the stick thanks to the unpredictability of current economic conditions. Interest rates are high, making borrowing more expensive, and supply-chain issues persist despite the post-pandemic environment, meaning it’s still challenging to buy in materials and source essential services.

“Interest rates are a major player at the moment for SMEs,” says Mark Occhiuto, Sales Director at Fifo Capital. “Accessing finance is not as easy as it’s perceived, and supply is still an issue as well. I don’t really think there’s been any easing off of the two, which are major drivers for SMEs that are trying to manage their working capital.”

In response, Occhiuto says SMEs are turning to alternative tactics, including negotiating better terms with suppliers or stretching out payment timelines to preserve cash flow. “Many businesses are slowing down on their payments as best as possible and only paying their mission-critical suppliers on time to keep up operations.”

Strategic financing as a resilience tool

But delaying payments isn’t a sustainable strategy for most businesses, so a more effective solution could be payables finance — an alternative form of financing that gives you liquidity without increasing your debt burden.

“Payables finance is more structured than traditional business loans,” says Occhiuto. “It lets business owners pay for something today and then repay it at a later stage, bringing a kind of discipline to how they manage their cash flow.”

Unlike traditional loans, which can build up lingering debt, payables finance links directly to a specific payable, helping business owners manage their finances in real-time. An SME might use payables finance to buy inventory, for example, then once they sell that inventory they repay the finance and are left with the profit.

Avoiding the debt trap

An unfortunate reality for many SMEs is falling into a ‘debt trap’ by relying too heavily on traditional loans to cover their operational costs. The result? A never-ending cycle of debt that can easily cripple even the most profitable business — especially in uncertain economic times.

“Business loans serve a purpose, but they are a bit of a Band-Aid for more underlying issues,” says Occhiuto, adding that SMEs should look for flexible financial options like payables finance that align with their cash flow cycles and business goals, rather than increasing their debt load unnecessarily.

Occhiuto references one client — a food-import business — that was dealing with major challenges when China essentially ‘turned off the tap’ during their shutdown. This meant the small business was suddenly competing internationally to secure scarce goods.

“They used a Fifo Capital facility to actually buy more of the product, which gave them more buying power with those suppliers and get in the stock that they needed early on,” he says.

Proactive financial planning for future stability

Financial resilience also requires proactive planning, which includes cash-flow forecasting, stress-testing financial plans and building relationships with finance partners.

“At the very least, SMEs should know their break-even point,” says Occhiuto. “Cash flow forecasting gives you the ability to see potential problems on the horizon and helps you make a decision that’s more informed.”

SMEs that take the time to work with their accountants or financial advisors can develop more informed strategies, which will in turn support smarter decision-making, especially in uncertain times. So if you’re just scraping by, Occhiuto advises you should be looking at your cash flow and fix the underlying problems first.

Despite the economic challenges that linger on, building financial resilience is something every SME should be committed to. It’s not just about surviving, but instead being strategic in how you position your business for growth. Tools like payables finance can kick-start your business’s upward trajectory, and doing some proactive financial planning can help you ride out the market’s ups and downs with confidence.