How do you fund the cashflow needs of your business?
“Each stage of the Cycle requires careful cash management”
Nearly every business that sells goods will follow a similar trading cycle to the one illustrated above.
Manufacturers of course will need to add the production steps before and after purchasing supplies and raw materials, but in every case, each stage of the cycle requires careful cashflow management.
How do you make sure that cash shortfalls at critical times won’t impede your business’s potential to grow?
We know that up to 80 per cent of global trade* is supported by some sort of financing or credit insurance today, so it’s very likely any business intending to grow will be using or considering appropriate finance.
So what is appropriate finance ?
In this article we describe how you might fill cashflow gaps in your working capital cycle with certain types of finance often supplied to SME companies by non-bank finance companies in the market.
Trade or Purchase finance
Trade Finance helps you bridge the cashflow gap between paying your suppliers and receiving payment from your customers.
Have you received a confirmed order from a customer (possibly a new customer) but you need cash much sooner than you would prefer, to pay for your raw materials and supplies, or imports?
Making supplier payments in this way is unavoidable in some industries and will have a real impact on your business and can restrict the pace of your growth.
Alternatively you may need to purchase goods based on forecasted sales or for stock. Using cash forwarded from a finance company at this stage can be a real solution to this cashflow challenge (especially when your bank won’t do it).
With regards to timing, this will allow you to access funds at the very beginning of the trade cycle.
Import finance & Letters of Credit
This type of finance applies when you need to import supplies or goods from overseas. Many more companies apart from banks now supply this kind of finance and finance support, known typically as Letters of Credit or a Supplier Undertaking, being a promise or guarantee to the supplier that they will get paid if they deliver the goods on time and according to your request.
Stock finance may free-up additional funding once your product is produced or through using existing stocks as security for the finance company, enabling you to release cash for working capital. Generally you could obtain 20-30% of the stock value at this stage if required.
Invoice finance allows you to access the cash tied up in an invoice, filling the gap between raising customer invoices and getting paid.
This type of finance can be up to 100% of the gross invoice value, and it occurs once the goods or services have been delivered. It is flexible financing as it grows as your business grows, and it can be used in conjunction with trade or purchase finance to complete the cycle (and even pay off previous trade finance raised earlier in the working capital cycle).
The term Factoring (of invoices) is invoice finance and typically involves outsourcing the actual debt/invoice collections process as well.
If you are exporting, in many cases we have dealt with the lender can assist further by researching as best as possible your foreign customer’s credentials, and creditworthiness, potentially providing you more peace of mind about the export opportunity.
If you are considering exporting you ought to be considering such finance early in the process.
Today, the majority of large business and many small businesses still look to main street banks to help finance their cashflow needs. However globally over half of all SME trade finance requests are rejected compared with 7% of all multinational finance requests*.
Business loans and overdrafts tend to be better suited to operational expenses and equipment purchases you might require for your business. Read more about bank lending here.
Is your business growth constrained by cash limitations? or is the cashflow effectively managed and financed to support growth?
Given that the availability of trade finance is often cited by businesses around the world as a major barrier to their capacity to trade, getting this aspect of your business right (and seeking out alternative and better sources of finance) is essential to enable your business to grow and take advantage of new opportunities to propel that growth.
*WTO report, Trade Finance and SME’s Bridging the gap, 2016
For more information about finance available to fund the working capital cycle, call us on +61 (0) 8 94803746 or email us for a callback: firstname.lastname@example.org