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Pinch Point or Squeezed Middle?

Piggy Bank and Clamp

It’s not as cryptic a question as it sounds. I commonly find that when I start to talk to a client about their business processes and cash flow they know that there is an issue or an improvement that can be made, but haven’t pin pointed exactly where a solution can be targeted or the best solution for them.

We are concentrating on ensuring that clients’ cash flow can, well, still flow in this environment, and a big part of that for businesses is to mitigate for any large cash calls on the business that could put a strain on their ability to meet existing or known costs and overheads.

For example, talking to a prospective client about how we could help ensure that their working capital supported their business, we discussed the fact that they had an existing Invoice Finance facility in place which helped to smooth their cash flow once they had produced the finished goods to invoice their customers; but a pinch point for them came at the point of ordering raw materials.

On more than one occasion suppliers had asked for full payment in seven days, and not offered the company payment terms. Faced with the choice of passing up on this and possibly future business from their customer, the company stretched their finances to the limit to do the trade and only regained a position of comfort again once the goods were finished and invoiced for.

If during this period, from trade order to customer invoice, another cash call or cost had presented itself then the company would have struggled to quickly meet it. Not to mention the short-term solution impacting heavily on their margin.

The client had been looking for a solution, and while they had other plans that brought us together for a conversation this was the issue that they immediately directed the conversation towards, and the pinch point in their process.

You could argue that it needed to be addressed before they looked further at growth plans, because if their ability to do business was limited by cash flow constraints at the point of ordering raw materials, then their growth would be limited.

At this initial stage of the conversation, how they fund the purchase of goods or materials has to be thought through, in combination with how they will get paid when they sell to their customers.

The cost of funding will slightly reduce their margin on the transaction – but with very little effect on working capital, and consequently they are still able to meet other demands that they face – as well as to fulfil any new opportunities that are presented to them.

Trade Finance

Depending on the nature of their business, companies will either buy raw materials that they manufacture or assemble to create finished and saleable goods, or they will purchase ‘finished goods’ from a manufacturer or supplier – packaged and ready for delivery to their customers.

Trade Finance can be used to fit a wide range of business types:

  • Purchase raw materials or finished goods
  • Trade can be with UK based companies as well as overseas
  • Commonly Trade Finance lenders are also experts in FX
  • Goods can be pre-sold, or to provide a stock for sale

Your business can improve prices and terms from having the backing of a trade facility and being able to pay earlier, and Trade Finance facilities can be flexible to accommodate deposits if required on order and other costs including import VAT and shipping if these are applicable to you.

In the current environment companies need to conserve cash within the business as working capital can become strained without much notice. Funding the acquisition of goods or materials that are either pre-sold or to provide you with stock leaves crucial cash in the business to cover overheads and unexpected demands on the company.

It of course depends on the nature of your business as to whether Invoice Finance is suitable for how you deal with your customers – but if it is suitable Trade Finance lenders offer Invoice Finance facilities to their clients for good reason – because they can then offer your business a seamless process without causing a large cash call on the company at any stage of your trading lifecycle.

Invoice Finance

Invoice Finance may not be the most suitable product for you in every part of the economic cycle – but think of it another way in the current Covid-19 pandemic: what other financial facility will pay you for most of the work that you have completed just a few days after you have completed it, when your customers won’t be settling anything with you for another 60 to 90 days?

Without that immediate cash flow you will have to cover the cost of wages, contractors, overheads, suppliers – and then if you have the opportunity to take on more work or another project, do you have the cash flow to do that now or will it have to wait until your customers settles in the future?

We see this as the clearest demonstration of the ends justifying the cost of the means – many businesses won’t be able to manage without these facilities in the coming economic climate – and we consider Invoice Finance will likely be one of the best cash flow conservation tools available to companies.

Trade and Invoice Finance available under CBILS to eligible companies until 31stMarch, 2021

We strongly believe that for Covid affected, eligible companies, the extended application time represents a unique opportunity to access funding that there is no guarantee will be replaced later in 2021. 

If and when underwriting returns to a world of no Government guarantees, and companies are evaluated on 100% of the risk of the borrowing, unfortunately there could be a period of adjustment for both businesses and lenders.

CBILS Trade Finance – Revolving facility up to £5m notional

No set up or service costs and no interest charges in the first 12 months (100% cost free for 12 months) – Facilities > £250,000 require a Personal Guarantee for 20% of the notional limit

CBILS Invoice Finance – Differing scheme features from our lender panel:

  • Invoice Finance with no set up costs, no service fee and no interest charges for 12 months (100% cost free for 12 months) – and no ongoing contractual ties beyond that period
  • Term loan alongside an Invoice Finance facility – loan for up to 40% of the facility level for up to 5 years, CBILS Business Loan benefits apply
  • ‘Top Up Funding’ – commonly up to 30% extra added to the pre-payment limit of the Invoice Finance facility – up to a maximum of 100% of invoice amounts submitted – no interest charged on the ‘Top Up’ portion for 12 months

CBILS Eligibility check:

Whether your business can on occasion suffer from a squeezed middle of overheads and creditors wanting payment far sooner than debtors settle, or you are aware that there is a pinch point at which your cash flow can or could break down, a conversation doesn’t come with any obligations but could highlight suitable solutions for your business.

Why not get in touch today and discuss how we can help you.

Mark. / 07726 195 106

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Essex Commercial Finance Limited  is a company registered in England and Wales with Company number 12610135
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