Managing working capital and cash flow is a critical concern for all businesses, but especially so for SMEs, and even a fundamentally sound and profitable business can soon run into difficulty through poor cash-flow management.
“If creditors falling due cannot be paid, confidence in a business of modest scale can evaporate quickly,” notes Colm Sheehan, director of corporate finance at Crowe. “Owners can mitigate this risk by maintaining a strong credit policy, having a broad customer base so they are not overly exposed, and leaning into the various funding solutions that are available in the market.”
It is very important to understand where a business’s working capital is tied up to determine which form of working capital is most appropriate, Crowe advises.
“If it is tied up in trade debtors, then invoice discounting is a good solution. If trade creditors, it may be an internal focus on negotiating extended credit terms while high stock levels may point to the need for improved operational efficiencies, or a stocking loan might also be a funding solution.”
READ MORE
Invoice discounting can be a useful cash flow source of finance, he notes, as it navigates the trade credit cycle of the business by providing cash flow when an invoice is issued as opposed to waiting for the credit terms advanced to a customer.
“An important distinction is that you retain control of the debtor collection process, which ensures that the customer relationship rests with you and not the lender. It is secured on your debtor book so no additional security is required. It’s also a rolling facility that can grow as your business grows – typically the facility will be for a percentage of your overall unaged debtor book. A disadvantage is that if your debtor book ages – that is, the average days that balances are unpaid grows – there will be a requirement to fill a funding gap with cash reserves as the available facility will reduce.”
Mark McEnroe, partner at PwC corporate finance, agrees that it is crucial for business owners and management to have an in-depth understanding of their company’s working capital.
“Analysing where capital is tied up and understanding the associated cycle is a key component of sound financial management but it isn’t always straightforward, and surprises do happen,” says McEnroe. “The best performers in this respect will typically have strong financial management tools such as a forecast financial model, have systems in place to effectively manage their working capital inflows and outflows, and will have access to a variety of sources of finance they can call on, ensuring they have sufficient headroom.”
Aoife McGinley, head of client services at Bibby Financial Services, adds that understanding where working capital is tied up is essential to selecting the most appropriate funding option. For some businesses, challenges stem from slow customer payments, while for others, cash may be locked in stock, seasonal cycles, or extended supplier credit terms, she points out.
“For example, invoice finance can ease pressures from late-paying customers, while stock financing may suit companies holding significant inventory. Businesses with seasonal fluctuations often benefit from revolving credit facilities that flex in line with demand, whereas supply-chain finance can provide breathing room when supplier terms are tight.
“Industry experience shows that identifying these dynamics is crucial to avoiding liquidity traps and ensuring funding reflects operational realities. A clear view of where capital is tied up also supports smarter forecasting and strategic use of reserves, enabling businesses to strengthen resilience and maintain steady growth despite market pressures.”
Businesses can access working capital through a variety of methods, each with its own benefits and limitations. Traditional bank loans and overdrafts remain common, but many SMEs find the rigid criteria, lengthy approval times and lack of flexibility restrictive. As a result, alternative options are increasingly popular, McGinley notes.
Other funding routes include asset-based lending, and supply-chain finance. These provide additional flexibility, allowing businesses to leverage assets or extend supplier terms. While each option carries different costs and levels of risk, specialist providers can deliver tailored, scalable solutions that better meet modern business needs.
Specialist lenders in Ireland are currently filling a gap in providing working capital and bridging solutions, says Laura Holtham, partner at commercial law firm Ogier. This is acutely seen in the real-estate market, from which the traditional banking sector has retreated since the financial crisis, she observes.
“Without the specialist lenders, the banking sector in Ireland would be in real trouble – particularly housebuilders, but small businesses are also benefiting from the growth of this sector,” says Holtham. “Most of the non-bank lenders are getting their funding from private credit funds, investment funds, family offices, pension funds etc, who all see Irish businesses as a good investment for their money.
“Some of the specialists who operate in Ireland are now becoming extremely big players in the market – both in Ireland and across Europe – which is driving competition and creating a healthy marketplace for Irish borrowers.”
Other sources of working capital include traditional secured loan facilities, where funds are lent and secured against the assets of the company, such as property.
“The advantage is that these are usually long-term loans so repayments are spread over a greater period and therefore often easier for a business to manage,” says Holtham. “The disadvantage is the security may be widely taken and limit the business’s ability to freely use its assets. It’s very important to make sure a lender understands the business and professional advice should be sought to ensure any terms are not going to restrict the business’ plans.”
