For small and medium-sized enterprises (SMEs), debt stress can be a critical and debilitating concern. From impacting daily operations to hindering growth potential, unmanageable stress can jeopardise an otherwise promising business.
According to the Ministry of Business, Innovation and Employment, the number of businesses entering liquidation in the first eight months of 2024 increased by 40% compared to 2023.
This concerning statistic highlights the critical importance of managing and eliminating debt stress within your business. That is why understanding what debt stress is, its implications and how effective cash flow management can alleviate the pressure are all important.
What is Debt Stress?
Debt stress refers to the anxiety and pressure that business owners or managers face when their cash flow is insufficient to meet debt obligations.
In other words, when a business is unable to pay its bills.
This pressure can arise from various sources. In some instances, there is simply insufficient cash flow management; meaning there is not enough accessible working capital to meet debt obligations. In other cases, unexpected expenses or sudden changes in market and macroeconomic conditions can contribute to declining revenue.
For SMEs, in particular new businesses, debt stress can be particularly severe as the tighter margins and higher operating costs translate to less financial flexibility. All of this means there is significantly more stress associated with debt.
The Impact of Debt Stress
Operational Disruption
When an SME struggles to manage its debt effectively, operations can often suffer. This may result in missed payments to suppliers, adversely affecting relationships and supply chains, or even halting production or services entirely.
Negative Impact on Growth
For businesses seeking to grow and take advantage of opportunities in the market, the burden of debt stress can make investing the necessary funds in long-term success all the more difficult. Growth often requires increased expenditure in marketing, operations expansion or new staff, all of which is trickier when there is little financial flexibility.
Internal Morale
Debt stress can affect both managers and employee morale. Concerns about a company’s viability makes all team members feel insecure about their jobs resulting in decreased productivity and higher turnover rates.
Impact on Credit Rating
Ineffective debt management can negatively impact a business’s credit rating. Poor credit may result in restricted access to financial solutions, higher interest rates, or less favourable terms, making ongoing cash flow management more challenging and creating a self-perpetuating cycle.
How Effective Cash Flow Management Relieves Debt Stress
Effective cash flow management offers a sustainable solution for SMEs and business owners to alleviate debt stress.
Maintaining a smooth, regular, and reliable flow of capital ensures operational stability, the availability of cash to meet financial obligations, and reduced stress.
Cash flow management can be improved through close monitoring of cash flow to ensure that any potential future shortages are identified before they become a critical issue. It can also involve optimising favourable payment terms with both suppliers and customers to ensure incoming cash flows arrive on time and your debt obligations are managed effectively. Additionally, reducing unnecessary expenditure by streamlining operations is another way to free up working capital and alleviate debt stress.
However, for some companies, debt stress cannot always be adequately managed through standard cash flow strategies. For those SMEs, ScotPac provides a customisable working capital solution: Invoice Finance.
Invoice Finance: A Solution for Managing Debt Stress
Invoice Finance allows businesses to access the funds they need and are owed but are otherwise tied up in unpaid invoices.
How It Works
When your business issues an invoice to a customer or client, there will be payment terms included. In New Zealand, this can last up to 30 days – and that is if the account is settled on time.
For many businesses, 40% in fact, late payments are a critical problem and disrupts cash flow and operations.
With Invoice Finance, you can sell your outstanding invoices to a third-party finance provider, such as ScotPac. Your business will receive an ‘advance’ percentage of the value of your outstanding invoices as cash, providing immediate relief for cash flow issues and enabling effective debt management.
Once your customers have settled the invoices, you receive the rest of the value of those outstanding accounts, less any associated fees.
In other words, Invoice Finance allows you to access tomorrow’s payments today.
For a more detailed explanation of what is Invoice Finance, read our blog here.
Benefits of Invoice Finance for Cash Flow Management
1. Improved Cash Flow
Instead of having incoming cash tied up in unpaid invoices, with Invoice Finance you can access the money owed to your company and ensure more reliable and consistent cash flow for ongoing debt stress relief.
2. Flexibility
Invoice Finance is a more flexible and customisable financial solution when compared with traditional loans. Your Invoice Finance facility can also scale to match your business’s needs and level of debt stress.
3. No Debt
Unlike business loans and other financing solutions, Invoice Finance does not contribute to your overall debt burden. That’s why it is an effective way for SMEs to handle their debt stress and meet their financial obligations without impacting future cash flow or operations.
4. No Collateral
Invoice Finance also allows businesses to access a line of credit without needing to provide property or other assets as security. This makes it more accessible, especially for smaller businesses.
Call ScotPac to Explore How Invoice Finance Can Eliminate Your Debt Stress
If debt stress is a significant challenge for you and your business, you are not alone. ScotPac supports over 8,500 businesses across New Zealand and Australia.
If debt stress is affecting your operations, limiting growth potential, or lowering morale, reach out to our team at ScotPac today. With over 35 years of experience, our lending specialists can help tailor an Invoice Finance solution to eliminate your debt stress and fuel sustainable success.
