- Any experienced entrepreneur would agree that there are many challenges in setting up and running a successful business. Resilient and successful businesses are able to develop and expand as they progress along the SME life cycle from start-up to growth and expansion phase all the way through maturity.
- There are times, however, where businesses face significant financial stress as a result of both external and internal factors such as a natural disaster, unprecedented pandemic, challenging operating environment, internal fraud, wrong business decisions and stiff competition. The ability of the business to weather through such challenges is critical to its survival.
It’s All About Cash Flow
- Positive cash flow is crucial to any business as it is a strong indicator that the business is sustainable and viable. With good financial management and capital budgeting, a business will be able to reflect the sustainability and viability of its practices.
- A business may be extremely profitable with soaring revenues/sales volumes but the inability to collect the ballooning amounts due from credit sales on a timely basis could be detrimental to its financial health. Whilst the revenue and cash flow generated would be able to meet the business’s capital and operational requirements, they remain insufficient to meet its financial obligations.
- At times, the business is in such a dire situation that it is unable to generate sufficient cash flow to even support its business operations, pay its creditors and bank loan repayments as and when they fall due.
Turning It Around
- Setbacks may be temporary and businesses can be turned around or revived through new business strategies and business planning, e.g. venturing into new product lines, cessation of loss-making products, changing marketing strategy, embracing digitalisation and adopting cost-cutting measures.
- For example, a trading company may be experiencing tight cash flow due to some uncollectable payments from its customers which have resulted in extended ageing of its receivables. A quick fix would be to intensify collection strategies and temporarily conduct the business on a cash term basis. At the same time, the business would also require some financial reprieve in repaying its financial obligations with the financial institutions.
Save Your Business – Seek Debt
Management Assistance Early
- Under these circumstances and when the entrepreneurs/business owners are genuine and committed to resolve their financial predicaments; they should come forward to resolve their predicaments with their existing lenders.
- Objectives of debt management:
- To give breathing space to owners to focus and re-strategise
- To provide time for the business to turn around
- To structure R&R according to the customer’s profile, needs and repayment capabilities (considering business and turnaround plans)
- When should SMEs start to seek assistance if they face business cash flow problems?
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Common Debt Management Proposals
Debt Management Arrangement to Cater to Specific Business Needs
Financial institutions will work with the SMEs to identify the most suitable arrangements in support of their business and their commitment in meeting their loan repayment obligations.
Some common debt management proposals that SMEs can explore with their bankers are as below:
Reduction in the monthly instalment amount and the lengthening of the facility tenure
Reduction of interest/profit rate
Partial or full waiver of interest/profit payments
Conversion of working capital facilities (e.g. overdraft & trade lines) to term loan with appropriate tenure based on repayment capability
Minimum interest payment at the initial period with a step-up structure for principal repayment/interest payment
Moratorium for payment of principal and/ or interest over a specific tenure