David Banfield, president of The Interface Financial Group, explains how accessing finance is a huge issue for many manufacturing SMEs in today’s market.
Having a healthy cash flow is important for all SMEs but perhaps particularly so for those in the manufacturing industry, who rely on cash in order to continue to make and supply parts. For many SMEs the world of finance still remains a mystery. Gone are the days of going to your bank and accessing a loan. Banks continue to retreat from the front line when it comes to funding the small business marketplace – but this is not necessarily bad news.
There are lots of opportunities for those who know their way around the financial marketplace. They can always find an opportunity in the secondary market, and with the government initiative requiring banks to help their ‘rejected’ customers to access that marketplace, accessing alternative finance is easier than before.
However which one is right for you? The secondary marketplace is made up of a variety of lenders offering funding collateralized by a variety of assets. These lenders all tend to be asset based lenders as opposed to equity lenders, which is still the domain of the high street banks. There are times however when asset based borrowing can fit an entrepreneur’s requirements very well. In some cases this can even be ‘off-balance sheet’ funding, making it an attractive proposition for smaller growing companies.
One of the most flexible facilities for the manufacturing industry is spot factoring or single invoice discounting. The flexibility that this service offers is readily embraced by SME’s that do not wish to or cannot enter into long-term factoring type agreements, or don’t have the volume requirements to meet the stipulations of conventional invoice discounters.
In an ideal world most small business owners would seek out a facility that was available as and when needed, there was no cost when the facility was not in use, and there were no restrictions on size of transaction, and naturally it was cost effective. Is this just a pipe dream or reality? Such facilities do exist so it becomes a reality situation.
In a typical spot factoring situation the manufacturer or service provider has made their service or delivered their product, they have invoiced their customer, and then the waiting game starts. Spot factoring removes the waiting by accelerating the cash flow to create an immediate payment against the invoice in question.
This type of facility can be engineered very quickly, initially a few business days, and then almost on demand for repeat business. So why wouldn’t everyone use this type of arrangement? The fact is that more and more expanding companies are seeking this type of quick and easy finance.
What causes a company to seek to accelerate their cash flow? Typically a faster cash flow creates a more healthy business, and one that has the capital it needs to expand. Growth is therefore a driving force in this area. As a company expands it will need more working capital, as it acquires that capital it will grow again and thus will need more capital, and so on. It is a growth cycle that can consume cash as fast as it becomes available.
For many SME’s growth comes in the form of new customers who bring in orders that push up sales at a dramatic and sometimes exponential velocity. Dramatic rather than steady growth can severely hamper cash flow. New customers that are able to provide substantial orders often means that the customer is in charge of the transaction. They have the buying power to dictate when they will pay and the supplier, if they wish to retain the business, has little option but to accept what often turns out to be extended payment terms.
This in itself should not be a problem as we have already discussed – there are options in the marketplace to deal with a growth in receivables. Therefore the problem is readily solved – spot factoring turns those new sales into instant cash, and the growth cycle starts over again. On the face of it a sound solution, but what happens when the customer says they will not allow the invoices to be sold or discounted. Now the problem becomes exasperated.
First can a customer dictate what happens to their invoice? They certainly can and, in many instances, this restriction on assignability creates ongoing problems for the supplier. While there is no immediate solution to this issue, other than not dealing with such customers, there may be a glimmer of light at the end of the tunnel in that the Government is starting a consulting exercise with the industry group that represents asset based lenders to see if there is some ‘legal fix ‘to the problem.
There is no doubt that if this hurdle were removed we would see even greater growth in the small business sector. As a business owner you need to be savvy about what you can do with your company assets in terms of using them for a finance facility, as it surely represents a great alternative to conventional lending.