How trade finance can transform retail woes
Retailers have been hit hard by the recession. None more so than this company, a supplier of high quality barbecues to major retail outlets.
On top of the tough economic conditions, last summer’s atrocious weather conditions had an extremely detrimental impact on garden furniture/BBQ sales.
Subsequently the pressures became too much. The company’s funders lost confidence and withdrew their support resulting in the failure of the business.
However, that was not the end of the story. Although the company went into administration, the lender agreed that the assets of the company could be transferred into a newco, from which the outstanding debt could be repaid.
The business finance challenge
Initially it seemed that business finance options available to newco were limited. SMEs have encountered a reduction in funding available from traditional bank sources.
Newco is an importer of goods. In order to trade successfully, in addition to its working capital requirements it needed to be able to provide letters of credit.
Furthermore it needed to be able to finance the import of goods from China.
The business finance solution incorporating trade finance
Luckily, newco managed to secure a new business finance facility, structured around a traditional trade finance product.
The trade finance facility provided Letters of Credit and documentary collections to secure payments to newco’s supplier in China, together with ensuing 90 day import loans to newco on receipt of product in UK.
Whilst the basic structure of the business finance facility was simple, the utilisation of various components made the whole facility effective. The overall facility combined the finance of goods, freight, duty and import VAT.
Newco’s purchase of stock is secured by non-cancellable purchase orders from end customers. These are either credit insured or supported by a letter of credit from an investment grade bank.
Purchases are also further secured against a hypothecation on the goods and assignment of the ensuing receivable from the end customer.
The lender also secured intellectual property license waivers to ensure any future sale of goods are not frustrated by brand owners.
In addition to the goods financed, a top up factoring advance was made available to newco, upon delivery of stock to end customers. This provided newco with additional working capital.
• The facility enabled the business to grow substantially in extremely difficult circumstances and generate substantial market share and income.
• The success of the business attracted a significant additional investment from new external investors, thus securing the business’s working capital requirements going forward.
• Recognising that trade finance enables newco to fund stock purchases safely and grow the business, newco and its new investors have since renewed the facility for a new season.
• To further support its growth strategy, newco is developing a countercyclical export sales strategy to grow sales in the quieter European winter period.
• The trade finance company is able to fund these under the facility and make further advances against the resulting receivables.
• Newco has gained the protection of credit insurance against failure of foreign buyers and any inherent political and transfer risk.
Business finance facility in brief:
• Approximately £2.3m of Goods financed to December 2012
• Facility renewed for new season in 2013
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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