A growing UK SME hits the same problem repeatedly: orders won, work delivered, invoice issued, customer paying in 45-60 days, payroll and supplier bills due now. The cash gap between cost outflow and customer inflow is the structural feature of running a business with credit terms. Working-capital facilities exist to bridge that gap. There are four mainstream options for the typical SME (turnover £200k-£5m): overdraft, invoice finance (discounting or factoring), term loan, and asset finance. Each fits a different cash gap and prices differently. This guide is about the choice between them, not generic forecasting (which is covered in our cashflow forecasting hub for the broader strategic context).
Building a 12-month cash flow forecast
A genuinely useful cash flow forecast follows a consistent structure:
- 1Opening cash position (start of month bank balance across all accounts).
- 2Cash receipts: sales receipts (timed by debtor days), VAT refunds, grants, loan drawdowns.
- 3Cash payments: payroll, suppliers, rent, utilities, VAT/PAYE/CT to HMRC, loan repayments.
- 4Net cash movement.
- 5Closing cash position.
- 6Repeat for each month, 12 months ahead.
- 7Variance review monthly: actual vs forecast, refine assumptions.
Typical mistakes: forecasting based on revenue instead of cash receipts, forgetting VAT and corporation tax timing, ignoring debtor days, treating payroll as monthly when it spans different cycles. A forecast that doesn't miss any of those is the foundation for everything downstream.
Bank loans vs alternative finance
SME funding sources 2026
| Source | Typical amount | Cost | Best for |
|---|---|---|---|
| High street bank term loan | £25k-£500k | 5-9% APR | Established businesses, asset-backed |
| Recovery Loan Scheme successor | £25k-£2m | 6-12% APR | Trading recovery, government-backed |
| Alternative lenders (Funding Circle, iwoca) | £10k-£500k | 8-14% APR | Faster decisions, weaker credit profiles |
| Invoice finance | Up to 90% of invoice book | 1-3% per invoice | Slow-paying B2B customer base |
| Asset finance | Up to 100% of asset value | 4-9% APR | Equipment, vehicles, plant |
| EIS/SEIS investment | £100k-£5m | Equity dilution | High-growth Ltds with EIS/SEIS-qualifying activity |
| Crowdfunding (debt or equity) | £10k-£500k | Variable + platform fees | Consumer-facing brands with audience |
Invoice factoring and discounting
For SMEs with a strong invoice book and long debtor days, invoice finance unlocks working capital:
- Invoice discounting: lender advances 80-90% of invoice value on issuance; SME continues to manage credit control; lender repaid when customer pays.
- Invoice factoring: same advance, but lender takes over credit control and collects directly from customers.
- Cost: 1-3% per invoice, depending on volume, customer profile, and notification arrangements.
- Best fit: B2B SMEs with debtor days above 60, customers with strong credit profiles, regular invoice volumes.
- Worst fit: B2C cash businesses, businesses with concentrated customer risk, businesses with seasonal volatility.
KPIs every SME owner should track
For most Harrow SMEs the right KPI dashboard fits on one screen:
- Cash on hand: today's combined balance across all accounts.
- Debtor days: 365 × (debtors / annual revenue). Target sub-30 for service businesses, 30-45 for B2B.
- Creditor days: 365 × (creditors / annual costs). Manage to terms, do not stretch beyond.
- Gross margin %: trend over rolling 12 months.
- Customer concentration: % of revenue from top 5 customers.
- Forward bookings or pipeline: revenue committed for next 30/60/90 days.
The Cash Flow & Funding Series
We're publishing two detailed pieces per week from this series. Check back shortly.
Effective credit control
Reducing debtor days is the cheapest source of working capital:
- 1Invoice on day of work completion, not month-end.
- 2Standard payment terms: 14 days for new customers, 30 days for established.
- 3Day-1 reminder for invoices overdue (automated via accounting software).
- 4Day-7 phone call for invoices unpaid past terms.
- 5Day-30 final reminder before late-payment fee.
- 6Day-45+ County Court Money Claim or debt collection agency.
- 7Late payment interest at statutory rate (8% above Bank of England base) plus reasonable recovery costs claimable.
Break-even analysis
Break-even analysis answers "how much do we need to sell to cover costs?":
- Fixed costs: rent, salaries, insurance, basic utilities (independent of sales volume).
- Variable costs: cost of goods, sales commissions, packaging, delivery (per unit of sales).
- Contribution margin per unit: selling price minus variable cost per unit.
- Break-even units: fixed costs / contribution margin per unit.
- For a service business: target hours × hourly rate must cover annual fixed costs plus business owner draw.
Break-even analysis is most powerful as scenario planning
Run break-even at three price points (current, 10% higher, 10% lower). The volumes required at each price reveal pricing flexibility and competitive positioning.
Seasonal cash flow
For seasonal businesses (retail, hospitality, tourism), cash flow planning has specific shape:
- Q4 retail: cash builds in Oct-Dec, drops in Jan-Mar.
- Summer hospitality: cash builds in Jun-Aug, drops in Nov-Feb.
- Pre-season working capital: stock and staff ramp-up needs funding 1-3 months ahead of peak.
- Post-season provision: keep 2-3 months of fixed costs in reserve to bridge low season.
- Match financing to cycle: revolving credit facility or seasonal overdraft beats term loan for seasonal businesses.
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