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Defending your business from a cashflow attack

Published on 25th October 2018

A technology manufacturing business supplying aerospace, automotive and defence clients was finding 90 day plus payment terms were putting a severe strain on their cash flow. We found the most competitive provider to offer an Invoice Finance facility.

Engineering manufacturing remains a key activity within the UK. There are hundreds of small engineering businesses up and down the country that provide world-leading products. But any small business that supplies large customers can find itself at a disadvantage when it comes to payments. Large businesses and organisations are likely to be cash-rich but operate to accounting procedures that mean slow payment schedules.

This isn’t so much of a problem when their suppliers are also large and have substantial cash reserves - but it is a major headache for smaller businesses. The problem of slow payments can be a serious one that can easily drive a successful company out of business.

In some sectors, terms of 90 or even 120 days are common, meaning an impossible cashflow burden for small businesses. You can’t pay out money for supplies, staff and overheads if you don’t have it. The result is that it may simply not be possible for your small company to supply large customers.

If your small business works to provide goods or services to large businesses, late payments could put pressure on your cash flow. Call us to see how Invoice Finance could provide the answers, and which type of facility is right for you.

This is, of course, unfortunate if it means missing out on what should be lucrative contracts. But if your business is the manufacturer of a high technology product and your only customers are large organisations, it means disaster.

We recently helped a client who faced just this problem. Their products are small but sophisticated systems used in the engine management systems of a wide range of vehicles, including aircraft. Their customers include car and truck manufacturers, aerospace companies and the defence sector.

“We supply some of the largest businesses in the world. Our technology is unique, and there is plenty of demand for the components we produce. But we actually had a funding shortfall because of the way we were paid.”

The company found that they were frequently waiting 90 or 120 days to get paid once an order was shipped. There was little they could do to persuade their customers to pay faster - the payment terms they worked to are standard practice across the industry, and they could not simply offer their services elsewhere.

A funding solution for the defence sector

The answer was to seek external funding - but getting the right kind of funding is essential for it to make the most impact. It may be possible for an established business to arrange several types of finance, but many of these can prove unwieldy and expensive if you need to rely on them as a basic factor of doing business.

The client came to Rangewell because we are independent and could be relied upon to find them a solution based around their needs.

“We are an advanced technology manufacturer - we felt we needed an advanced financial solution.”

Although the company works in a very specialised sector, their problem is not confined to their customer base. Late payment is actually a serious issue for many small companies that serve larger customers. We’ve helped many of our clients find the most cost-effective answer to this same funding problem with Invoice Finance.

With this type of funding, a funding provider will use your invoices as the security for cash advances. It means that instead of waiting for a customer to pay, a company can get a cash payment as soon as they dispatch an order and issue an invoice.

Discussing the options

We discussed the various types of Invoice Finance with the client. Although all are based on the principle of providing a cash advance with the value of the invoice as the security, there are variations which allow each arrangement to be tailored to the needs of the business being served.

Getting the most appropriate solution will mean understanding the sums involved, the type of customer that the client is supplying, and their sector. It is possible, for example, to simply ‘sell’ all your invoices to a funding supplier. This will provide not just cash, but an outsourced credit control service. The lender will have a specialist team to chase up payments from your customers.

However, when we looked at the business, we saw that there was one client, in particular, causing most of the cashflow problems.

“Our ‘problem’ client was actually very important to us. They were a large defence vehicle manufacturer, and their vehicles depended on our systems, but they were the worst at paying. We believed they were delaying paying us until they had been paid themselves. They were supporting their own cashflow at our expense.”

Selective Invoice Finance - a flexible solution

The fact that most of our client’s cash flow issues were caused by one customer which made large value orders made us realise that the most appropriate solution would be a Selective Finance arrangement. This would allow them to choose the invoices they submitted as the basis for drawing down funds.

A Selective Invoice arrangement means that you do not need to put all of your invoices through a finance solution. Many relationships with customers may run smoothly, but when a large order from a lucrative but slow paying customer comes in, Selective Invoice Finance ensures that there will be no payment problems as a result.

“Our Selective Invoice Finance arrangement let us have the cash we needed from our large but slow paying customer - without the wait.”

Our client could get around 85% of the money they were owed by the client with each invoice they sent immediately, with the remainder, less the finance providers fees, when the customer paid up. So, rather than waiting up to three months for a payment, our client could get an immediate payment as soon as a batch of components was shipped and an invoice sent. It could also mean an immediate end to their cash flow gap.

We were able to set up a facility with a monthly limit of £150,000, providing ample funding for their current workload - and leaving them in full control of their business.


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Richard Mitchell

Richard Mitchell

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