A case study describing business finance options available for businesses with irregular cash flow
Business growth is a good thing…yes? As this case study reveals, sometimes it can prove quite a challenge.
When demand from customers of a rapidly growing supplier of computer hardware and software exceeded its ability to supply, the company found itself running into problems.
Furthermore, the company found that its good quality customer base was taking longer and longer to pay.
In addition irregular, ‘lumpy’ customer payments squeezed its cash flow, meaning that it was constantly hitting its supplier’s credit limits.
Elsewhere, the company’s rapid growth meant that its liabilities to HMRC were becoming more and more significant. Paying HMRC on time was becoming yet another challenge.
That is when the company turned to us, a business finance brokerage.
At an initial meeting with the company, it was discovered that special offers made available by its suppliers, would enable the company to buy stock at a lower price, thus significantly increasing its margins.
… if only it had the available cash to do so.
Business finance options available
The Business Bureau determined that there were two possible solutions to the client’s problems. Both involved cash flow finance in the form of factoring and invoice discounting.
Option 1: Confidential Invoice Discounting together with Trade Finance
Confidential Invoice Discounting
Here the company could generate immediate funds against its invoices, usually up to 85% of the value of the invoice. This would allow the company to:
• Pay its suppliers earlier.
• Benefit from early settlement discounts.
• Have credit available to be able to purchase more stock.
The company would be responsible for its own credit control. The reason why the service is ‘confidential’ is due to the fact that the company’s debtors would not know that it was employing the services of an invoice finance company.
Accompanying Trade Finance Facility
A Trade Finance facility running alongside the Confidential Invoice Discounting facility would enable the company to fund the purchase of larger amounts of stock, without tieing up its existing lines of credit with suppliers. With a trade finance facility, the lender buys the stock on behalf of the company.
Option 2: Single Invoice factoring/Spot Factoring
Company’s that suffer from ‘lumpy’ invoicing, also have the option of generating finance against single chosen invoices.
This is called Spot Factoring or Single Invoice Factoring. Companies needing to smooth over the peaks and troughs of business often use this facility.
The difference between this type of facility and a confidential invoice discounting facility is that the company would benefit from an immediate injection of cash, without having to commit to a full term invoice finance facility.
With a single invoice factoring facility the company could choose between generating finance against a single or group of invoices. It could even choose to generate finance against a single debtor.
As a result of our discussions, the company initially implemented a single invoice factoring facility.
Due to the flexibility of the facility, i.e. the company is not bound by a long term commitment, it can always move to an invoice discounting facility if it needs to in the future.
Additionally, the company has also utilised a stand-alone Trade Finance facility to fund additional stock that it was able to secure at a very good price.
Author: Business finance broker Simon Button. Simon has worked in the commercial finance sector for over 25 years. He has a proven track record in sourcing business finance options for clients in a range of sectors.
For more information about relieving creditor pressure or factoring and invoice discounting please do get in touch.
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