It is true that SMEs are prone to financial problems in their early years, which put their cash flow at risk, hence their sustainability over time. But it is an avoidable situation.
Make the best decisions for your business with the help of this best practice guide and tips on how to keep liquidity flowing.
The advice we give you works to improve your liquidity management, whether your SME has just started or has been running for a while.
How to survive the first years of life of an SME?
Did you know that there is a cross-cutting phenomenon for small and medium-sized companies that threatens their growth and operation during their first years of life? It is known as the "valley of death".
What is the valley of death?
According to the book "El Valle de la Muerte: How to overcome the start of entrepreneurship", by Robert Musso and Germán Echecopar, it is the stage that goes from when an entrepreneur starts his project and begins to make expenses, until he eventually succeeds in making his company is in equilibrium, that is, to get at least to have income equal to its expenses.
In general, it corresponds to the first three years of life or the first stages of development of a venture, where only expenses occur and the possibility of running out of capital or cash flow is permanent.
How to overcome it?
It mainly addresses the following points:
1. Define goals
The ERpyme association recommends that you establish short and medium-term objectives because by measuring and comparing reality with your planning, you will be able to take concrete measures to ensure that these goals are met.
2. Prioritize sales
Although it sounds logical, generating income through customers is much better than doing it from your own pocket. Remember that a stable income stream depends largely on the priority you give to your sales.
3. Organize your finances
Consider aspects such as professional accounting, budgets and income statements so that your business remains financially organized.
Also, get financing to get around this complex stage. In the words of Mario Ortiz, this resource is not to raise capital, but to invest in preparing prototypes for commercialization or testing your product or service.
4. Develop your soft skills
Activate these abilities:
Resistance or the ability to keep the vision of the business immovable in mind and despite its poor results.
Agility, being able to adapt to changes, constantly monitoring what moves your customers, examining the competition and differentiating yourself, explains Plus Empresarial.
Cooperation between your team so that it is competent and capable of validating each business idea.
Anticipation or the virtue of understanding that products become obsolete in the short term and that, therefore, new functions must be thought of to replace them.
Renovation, because no matter how good the design of your product is, if the market does not demand it, there is no point in continuing with its development.
Assessment or the ability to assess the continuity of the project.
What do successful entrepreneurs advise?
Bárbara Soto, 2015 entrepreneur chosen by the Chilean Entrepreneurs Association (Asech), believes that the obstacles that hinder the good development of companies come from not having a limited business plan, with realistic experiences, clear objectives, and containing all variables.
In addition, he considers that one of the keys to the survival of an SME is to protect itself financially, which is very different from abusing loans if there is no assured flow because it makes companies vulnerable to any change in the scenario.
Now, how to ensure this stable cash flow? It is time for you to know the recommendations of our specialists.
5 Top tips to manage your business cash flow
1. Evaluate and adjust the price of your products or services
What is the production cost of my product? And how much do I want to earn with it? These are questions you need to ask yourself to establish a pricing strategy that helps you increase cash flow .
If, after answering both, it is necessary to increase the price of your product or service, what should you do ?:
It gives an added value that allows you to increase the price, without affecting sales.
Analyze the competition to set a price that is more tempting to customers.
Offer an offer or promotion so that the clientele remains and, hopefully, increases.
2. Establish a collection plan
Avoid getting into trouble for debtor customers by applying a collection plan with payment policies. Here are some strategies to implement it:
Provide discounts or split payment options to those who pay in cash or in advance.
Expand the number of clients so that the entire management of your business does not depend on just a few.
Align the payment to suppliers with the payment of customers so that there is order and the money can come and go without affecting your cash register.
3. Reduce costs
To reduce costs and give margin to the amount of money that is in your SME, you must know the total cost of your operations and reduce variable costs, if possible.
For example, if you have an office, identify if the water, gas, and electricity services are used efficiently, or if there are current promotions in other companies so that you can pay less.
4. Choose to work with long-term projects
Consider working on long-term projects with your clients . In this way, you create a lasting relationship and make sure you have income for your SME for a specified period.
When you have a portfolio of fixed clients and for a considerable time, it is easier for you to project the finances of a business and have greater certainty of the cash flow that you will have during the year.
5. Consider using factoring
It is an ideal type of financing for businesses that need, due to an emergency or financial disorder, liquidity easily and quickly.
If you have an invoice and/or check receivable in the short term, factoring allows you to transfer the collection of these documents to expert hands on the subject. They buy that invoice and / or unpaid check from you and are in charge of managing that collection. In parallel, they give you a percentage of the money associated with that document.
In addition to this, as well as factoring, there are also other financing alternatives available to you to solve your cash flow problems. Here we give you more details.
The private financing alternatives that help SMEs to grow in Chile
Crowdfunding
According to Economipedia, it consists of using the capital of numerous individuals through small contributions . Through an online platform the project is disseminated and the resources are obtained.
In Chile, there are several types of crowdfunding, from platforms that connect companies that need financing with people who are willing to lend them money, to instances to find collaborators who can be part of the project or receive a reward in exchange for participating in their sponsorship.
It is a financing system that shows a growth of around 12.6% , according to data provided by El Dínamo.
Bank credit
As defined by the blog Those who are in all, a commercial bank loan is the exchange of an amount of money in the present , which will be returned in the future, with acquired interests, in a term agreed between the lender and the debtor. It is offered by different financial entities, be they banks or cooperatives.
Unlike a personal loan, the institution determines the evaluation of risk, terms, prices, and amounts, based on the accounting and business income, profit projections, and, in general, all information that allows determining the payment capacity of the company that is requesting it.
For this reason, it is often a difficult financial service to achieve for companies that are just starting out.
However, according to the ChileAtiende portal, Corfo created a loan financed through non-bank intermediaries , which precisely grants this loan to natural or legal persons whose income does not exceed UF 100,000.
Leasing
It consists of financing up to 100% of the value of capital goods or productive assets of a company, for a specified period of time, as long as these do not exceed UF 15,000 and can be granted by both banking and non-banking institutions.
However, as stated by the Secretariat of Internal Taxes on its website, Corfo can approve the financing of operations for an amount greater than UF 15,000 , considering a term of more than 5 years (the normal term is 3 to 5 years) , or also to companies with annual sales over UF 100,000.
In any case, the company pays a kind of rent in exchange for using a productive asset that, among several other assets, can be offices, machinery, or cars.
Factoring
It is one of the most consolidated financial tools in the traditional market and was created precisely to counteract the cash problems of small and medium-sized companies, which often suffer from a shortage of liquidity due to late payment of their work orders.
Factoring companies buy invoices, checks, bills, contracts, purchase orders, and other documents, and they do so by receiving a percentage of the amount to be collected from the initial debtor, which generally pays 30 days or more.
Thus, the SME releases pressure without incurring any debt with the financial system, since it only establishes a commitment with a third party (the factoring company), who in turn clearly establishes the obligations acquired by the business that seeks its financing.
On the other hand, today thanks to the evolution of the financial market, all these services are no longer the only ones that help your SME to satisfy its financing needs. Here we present more.
What other financial services do SMEs have access to in the country?
This, being able to give them more and better options to stay operational and even grow.
In this scenario, banks have integrated service areas for small and medium-sized companies, with personalized advice, preferential rates and a broader range of financial products and also, entities such as Achievements Financial Services have appeared with initiatives to support liquidity according to the economic contingency with flexible and fast products such as:
Working Capital Credit
Considering that according to the V Longitudinal Business Survey for SMEs, the main reason for requesting a loan and / or loan corresponds to financing working capital , this financial service is essential.
It solves liquidity problems between 12 and 24 hours after its approval, helping to organize finances and giving the possibility to choose the term to pay it according to the cash flows of the business.
Irrigation Bonus Financing
This product is of great help for contractors, construction companies, companies in the agro-industrial area, or in the particular cases of farmers who need to inject liquidity into their completed or ongoing works.
It consists of financing the irrigation bonus awarded by the National Irrigation Commission (CNR) for the construction of new irrigation and drainage works; improvement or repair of existing works; installation of a technified irrigation system, among others.
Financing with purchase orders
The recurring problem for many SMEs is having to wait for customers to pay their POs between 30 to 60 days, which is solved by financing purchase orders that have not yet been invoiced to obtain immediate liquidity.
This financing is designed to anticipate flows on purchase orders , that is, it advances a percentage of the total amount of the order and to obtain it, the following must be considered:
Validity of the PO, must have an established delivery date and amount.
The history as a company and that it is fiscally healthy.
Relationship that the requesting company has with the client that issued the PO.
Now, since you know a large part of the financing options at your fingertips, are you ready to take advantage of them? Before making your decision, first identify which one suits the needs of your company.
Learn about the support you receive from Achievements Financial Services
To acquire a financial product according to your plans, it is a priority that you receive an immediate response and the clearest and most accurate information possible. In Achievements we help you.
How is the advice that Achievements provides?
The benefits you get by receiving this advice are:
Permanent accompaniment
From the first contact with our executives, and regardless of what you need (if you require financing, want to factor, have checks that you want to advance, etc.), you are guaranteed a flexible accompaniment so that you know how we can help you.
That is, in addition to having communication via email and telephone, we also go to your office to maintain personal contact thanks to the availability of our network of professionals in various parts of the country.
You know the reality of your company
The executive in charge of monitoring you, assesses the current situation of your business based on:
Business data
Find out what you do, what your market is if you work in a single region or have different branches; the behavior of your flows, and other details about the company.
Tributary information
Through your tax folder, analyze data from the last 12 months: how were your sales, if you are up to date with the payment of the corresponding taxes or not, how many back taxes you have, and so on.
Once this analysis has been carried out, our professional helps you to know the general panorama of what is happening in your company and tells you how many possibilities you have to be a candidate for financing, if you lack requirements to meet or your documentation is incomplete.
You get a useful financial product
Once knowing your business reality, your executive offers you a specific product focused on solving your cash flow or lack of liquidity problems.
The financial advisory service that our team gives you helps you find the financial product that benefits you the most, always taking into consideration the area in which you work, the business specifications, your objectives, and the level of risk you are willing to take. to run.
You receive support even when your situation is unfavorable
If in the opposite case, your business is still not eligible to receive financing, we also explain why and what you should solve to improve your situation.
Once you meet the missing conditions, we are available when you want to contact us again and receive personalized attention to analyze your opportunities again.
What financing solutions does Achievement provide to SMEs?
We have a division specialized in services for micro, small and medium-sized companies that solves problems of lack of liquidity and cash flow. These are:
Traditional factoring
Finance short-term accounts receivable through invoices and checks.
Financial factoring
Reprogram liabilities and cover cash deficit.
Purchase order financing
Advances a percentage of future purchase order flows.
Contract financing
It anticipates flows on current contracts where the service contracted with the third party is provided monthly.
Fixed Rate Working Capital Credit
Finances business growth projects.
Advance Invoice Financing
Its purpose is to start your work or project.
Advance Financing in Construction Works
Finances up to 10% of the amount of a construction contract.
Financing Subsidies SERVIU (Reconstruction Committee)
Designed for the reconstruction of homes for families affected by natural disasters, which has assistance assigned by the SERVIU and complies with the Reconstruction Program of the Ministry of Housing and Urbanism (MINVU).
Financing Subsidies SERVIU (Housing Committee)
Oriented to construction companies and contractors who issue invoices to the “Housing Committee” for expansion, repair of homes and surroundings.
Irrigation Bonus Financing
Awarded by the National Irrigation Commission (CNR) for irrigation improvements in general.
Financing Subsidy Thermal and Photovoltaic Systems
Delivered by the MINVU for the installation of solar thermal systems and photovoltaic systems.
Even so, so that you have a clearer idea of what these financings do for your SME, below we share two cases of companies, which, like yours, presented difficulties in their finances but with the support of Achievements Financial Services, they got ahead.
Success stories: 2 SMEs that overcome their lack of liquidity
Both companies quickly realized that they would have trouble meeting their financial obligations as they grew; hiring new workers, increasing positions, adopting new processes. Doing so became even more complicated without a financial plan behind that recognized these new expenses.
How did they get ahead? Both companies tried different alternatives until they reached factoring. Learn about their history here.
COF Engineering Case
With the growth of this SME came the first financial problems and its lack of liquidity became evident. With this situation, he decided to request financing from a bank, but the answer was negative.
Thus, he began to evaluate other financial alternatives. The keys that helped her choose were:
1. The bank is not the only option
After several banking institutions closed their doors and after investigating more, her research of options led her to Achievements Financial Services , a company with which she spoke about the complex scenario in which she was. It was then that they received advice and clear and precise information on the type of financing that would best help them.
2. Factoring is an effective and profitable alternative
After learning more about factoring , his scenario changed for the better. After applying and receiving these funds, COF Ingeniería was able to:
Continue with projects you already had and take on new projects.
Hire more labor.
Being able to react to an inconvenience.
Access larger projects.
Have increasingly higher amounts of liquidity.
3. Don't be afraid of different financing
For the company it was necessary to put aside the negative comments of some people about something other than commercial bank credit. Every time SME leadership commented that they wanted to factor, many warned them that it wouldn't work. However, today you are aware that these comments responded to a general lack of knowledge about this type of financing and the industry that provides it .
Merc Solutions Case
As the number of workers in this SME increased and given the long periods between the issuance and payment of purchase orders and customer invoices, the payment of their labor obligations began to put pressure on their finances.
To respond efficiently to this, this SME followed the following steps:
4. Evaluate all financial services available
For the SME, it was necessary to know in detail all the available alternatives, until they found the one that best suited them: factoring with a company specialized in this type of financing.
Thanks to the liquidity received, he was able to continue with his operations and duplicate his efforts, since he was able to tackle many more projects than he could do without this alternative.
5. Know very well the financial providers to hire
When hiring a financial service, a quality strategic partner is required , so the company first investigated the different factoring providers available in the Chilean market, as well as whether they offered the possibility of building a relationship with an executive capable of maintaining a connection nearby to manage the account.
6. Properly manage the chosen financial mechanism
To ease factoring management, this SME today does not work with a single provider, thus diversifying its financial options, and as someone who is exclusively in charge of collections and interacting with factoring companies.
Don't wait until the last moment
The objective is that you apply these practices to overcome that difficult period that every company faces: the first 3 years when income is not enough to stay solvent and financial responsibilities still exceed profits. In other words, your income and expenses are not efficient at all.
In fact, the ideal is that you access any type of external financing without waiting for your box to be at critical levels. What's more, they work better as control and sanitation mechanisms for your box so that it is stable over time.
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