1. My business is growing too fast
They’re called growth pains for a reason – every business aspires to grow, but not every business is ready to do so. Investment in new products, bringing in new stock and new staff members are all costs businesses must incur to continue growing, but may have the expense fall due before you’ve been able to realise extra cash from your growth.
This is a common problem and each time the pros and cons must be thoroughly weighed up. If the new business is of marginal profitability, and servicing it will be detrimental to your existing customers then unfortunately, often the answer is not to take on the business.
If taking on the business is the route you elect to take, , then the questions becomes “how can I afford this”. Cash-flow planning and budgeting will help identify any holes, and using financing facilities (debtor finance, trade finance or traditional bank loans) to fill the void is the best way to ensure the negative impact on your business is minimised.
2. My customer’s aren’t paying me on time, or are expecting extended terms
Trading terms – how long your customer takes to pay you, also called Day Sales Outstanding (DSO) – are increasing in most industries. This can be because the industry is dominated by large corporates who can dictate terms to their suppliers (for example, the supermarket chains) or because your customers are facing some of the same cash-flow challenges you are, which means they’re paying you late.
Sometimes, you have no choice but to offer extended terms (up to 90 days End of Month), because that’s what’s required to win the business and remain competitive. Other times it may be a more prudent decision to walk away from the business, as the risk and detriment to your own cash-flow and operations may not be worth the upside of bringing on new customers.
What are the best ways to manage this problem?
A large corporate who says they’re going to pay you in 120 days and actually pays you in 120 days is sometimes better than a customer who says they’ll pay you in 60 days but pays in 90 – as in the latter circumstance you aren’t able to plan for the negative cash-flow implications on your business. It is for this reason that having an underwriting and risk assessment process for your customers is integral, to assess the risk of non-payment or late-payment. A sale isn’t a sale until the money’s in the bank, and looking at a customer’s capacity to pay you is as important as your ability to close a sale.
Assuming you’ve determined that you want to deal with the customer on extended terms, having a detailed cash-flow forecast, factoring in the payment cycles of your customers, with contingency built in, will ensure that your business can still keep doing what it needs to do.
If your cash-flow forecast ends up negative, then it’s time to inject finance into the business. There are financing options which are perfect for the situations outlined above, including debtor finance, which may be worth exploring.
3. My suppliers won’t give me trading terms
Increasingly as the world is made a smaller place through globalisation and international trade, trading terms are becoming more and more difficult to obtain. Factories often want deposits before beginning production, and risk adverse organisations with their own cash-flow strains may expect payment prior to delivery.
There’s no easy way to guarantee yourself trading terms. Usually once you’ve built up a solid enough relationship with a supplier they’ll offer them to you, but this is not always the case. What is important is to acknowledge that sometimes price isn’t everything – purchasing where you have to put up a deposit and pay cash may end up being more expensive than the same product with a 10% higher price where you have 90 day trading terms due to the time value of money and the lower administrative load on your business.
Assuming your trading terms are not sufficient, and most are not, as is the case in other scenarios, having the correct financial instruments in place to support your inventory acquisition can fill any cash shortfall created by inadequate trading terms. Trade Finance (sometimes termed Import Finance or Inventory Finance) designed to solve this problem, but traditional bank loans and /or overdrafts may be sufficient depending on the size of your cash shortfall.
4. My business is seasonal
Every business has peaks and troughs. Some have more than others, and some know in advance that their business is particularly seasonal in nature, which can lead to cash-crunches when large supplier payments are due before money has been received from customers.
As businesses grow the seasonality generally decreases, so this should be dealt with in a similar way to dealing with growth pains: forecasting and finance. Having your forecasting in place with the financial facilities to fill the shortfall will mitigate the problems, but the goal should be to keep growing until this seasonality isn’t a problem.
5. My finance provider won’t give me enough money
Spending money to make money is an idea all business people understand but sometimes banks do not. Banks want to lend to companies which have balance sheets so strong that they don’t necessarily need the money. The growing businesses with opportunities and the need for money can be left without enough money to service the opportunities.
To ensure you have appropriate financing in your business, you must first understand the options available to you. Ask your colleagues, suppliers, and friends how they’re funding their business, talk to your bank manager, talk to your accountant, talk to brokers, and trawl google for finance options. While there’s no single source of truth, if you look hard enough you’ll find the best option for your business. And only you know what that answer is.
Moneytech is an Australian commercial finance organisation specialising in Trade Finance (Credit Express) and Debtor Finance (Confirmed Capital). We aspire to become trusted partners of our customers. We support their growth by both understanding their business, and creating innovative financial products based on their feedback which fulfils their needs. Continue to our web site to learn more, or call us on 1300 858 904.