Late paying customers can cripple cash flow. Companies who transact business overseas are at greater risk from late paying customers. They also suffer a greater risk of having to write payments off.

This is the story of a South Coast engineering company that was initially delighted to experience significant growth having won new orders from Eastern Europe.

However problems soon arose for the company when it found it had underestimated how hard it would be to manage overseas invoice collections.

The situation

Prior to winning its European orders, the engineering company was funded by a small bank overdraft.

In terms of credit control, the company’s accounts clerk carried out invoice collections by simply telephoning clients as and when the invoices fell due.

How the cash flow problems arose

In order to fulfil the new European orders, the engineering company needed to increase its purchase of raw materials. The cost of purchasing raw materials upfront immediately put pressure on the company’s existing overdraft facilities.

Elsewhere, the company found itself encountering problems of:

• Overcoming language barriers when chasing money.
• The small, but significant time difference.
• The length of time customers took to pay.

Despite the problems, the company persevered with its orders. However as invoice payments became more and more overdue, the more pressure was put on the company’s cash flow. As a result, it wasn’t long before the company found funding raw materials difficult.

Initial steps taken to resolve the credit control problem

The company initially approached its bank to see if it could increase its overdraft facility. Unfortunately, the bank was not forthcoming. Therefore it turned to its accountant for advice.

The accountant identified the company’s 2 main problems:

The outlay required for purchasing raw materials up front.
The fact that customers were taking upwards of 90 days to pay.
As the company’s problems clearly centred on cash flow, the Accountant introduced us, a business finance brokerage. Our first step was to introduce the engineering company to suitable invoice finance company.

With proof of firm orders from its customers, the invoice finance company was able to offer a trade finance facility to tackle the first problem: how to enable the company to commit to the purchase of raw materials.

Then, in order to tackle the problem of increasingly overdue invoices, the invoice finance company provided an export factoring facility.

The main benefits of an export factoring facility are that it combines the immediate provision of working capital with overseas collections/credit control services.

The new export finance facilities were implemented within two weeks.  In the meantime the engineering company continued to collect its domestic invoices itself.

In addition to these facilities, the invoice finance company credit insured the company’s overseas debts for added protection.

For all that, one of the main issues the company had was obtaining sufficient credit limits on its Polish customers. Luckily we work with an excellent network of credit insurance brokers, who were able resolve this problem by obtaining suitable limits.

The results

The new invoice finance facility resolved all 3 of the engineering company’s problems:

• The Invoice finance company arranged for the company’s suppliers of raw materials to be paid with a Letter of Credit.
• The amount due on the Letter of Credit was then repaid when the invoice was raised and factored.
• Overseas collections were carried out by the invoice finance company, which used specialist collectors able to speak the local language, thus reducing the day sales outstanding.

Consequently with a new finance facility provided by the invoice finance company, totalling £420,000, the engineering company was able to repay its £40,000 bank overdraft, which made the bank very happy indeed.

If you would like to know more about how to manage export credit control or about any of the business finance options mentioned in the case study, please do get in touch.