Not all working capital facilities are created equal and when it comes to looking at the differences, not all banks are equal either!
One of the most common reasons, that we are introduced to a new client is to help them with working capital.
In many instances, they have approached their bank first and have been offered anything from an overdraft, business credit cards, invoice finance or trade finance. However the solution to working capital strain is not 100% solved by the introduction of a debt limit. In fact, we see too often that a debt facility that is not match to the business’s needs correctly, can end up doing more harm than good as “core debt” builds up and interest costs increase.
We offer our Trading Business Package with the objective of reviewing the business’s funding needs, seeking out the most appropriate options available to them and then, most importantly, helping educate business owners and accounts staff on how and when to use the limits appropriately.
To unpack this a bit further, let’s review the different elements of working capital.
Essentially, it is the funds or capital required to run the day to day activities of the business. The cash flow cycle of a business is where we look to find out where funding gaps may exist. In its most simplistic form the cash flow cycle is the time taken between the following activities:
1) Purchase made (Creditors)
2) Goods/services received
3) Sale made/invoice issued (Debtors)
4) Cash received – then back to Purchases made etc etc
There may be variations to this depending on the type and industry of business. For example, a service business cash flow cycle, where they may have very little in the way of purchase or stock, will be different to that of a manufacturing business where they may have to make large purchases and hold stock for a long period of time.
But these differences are exactly where a “one size fits all” solution can do more harm than good.
We have been working with a client recently that imports goods and wholesales to a retail market. The biggest impact to their cash flow is the time taken from payment for goods to the receipt of goods to their business which could be up to 90 days. However, their bank has recently put in place a Debtor Finance facility that helps them fund their invoices from customers. This part of the cycle, however, is being proactively managed and sits within reasonable terms with many of the clients paying inside 30 days.
So why was it offered? Basically it suited the bank as they feel secure knowing they have control of the businesses income via the Debtor Finance facility, it was relatively easy to implement and not all banks can offer all types of working capital finance facilities.
Following in-depth review of the situation, we discovered that a more suitable solution would be Trade Finance, where the bank facility will fund the purchase of stock, essentially freeing up their biggest cash flow gap between purchase and sale. This can be supported by a small operating overdraft and a stand-alone Debtor Finance facility that allows them to finance only the invoices they need to, rather than having to 100% invoice finance all invoices, thus reducing interest cost in this area.
In short, finance for Trading Businesses can be complex but it need not be as stressful as some banks/brokers/advisers will make it. This is our specialty and we are enjoying helping our clients grow, by offering advice and tailored solutions.