For many businesses, a lack of healthy and predictable cash flow is the single biggest barrier to success. This is illustrated by ASIC’s most recent insolvency report, which shows that inadequate cash flow is the most common cause of business failure. Of 7,498 administrators’ reports lodged in the 12-month period before June 2019, 51 per cent indicated this as the most common cause of insolvency. The top industries affected were manufacturers, wholesale traders, and accommodation and food services.

shutterstock 779340934 300x200 - Manufacturers and wholesalers need to master cash flow to prosper

While all businesses struggle with cash flow, manufacturers and wholesalers are especially vulnerable. This is, in part, because they often import large supply shipments from overseas, requiring them to invest a lot of working capital in a long cash conversion cycle. Not only are their capacities limited by the amount of working capital they can bring to bear, a cash flow interruption can also prevent the timely reinvestment of that working capital, potentially disrupting operations.

No business can afford to shut down production every time it faces an untimely cash flow interruption. To protect themselves from this, they can use trade finance and invoice finance to improve their working capital position.

Traditional trade finance doesn’t work for many businesses

Many businesses who import goods from overseas already use trade finance to fund their purchases. Instead of purchasing the goods outright, they work with a financier, who will make payment to the supplier on their behalf. Unfortunately, traditional trade finance is an imperfect solution for many wholesalers and manufacturers. The facility is traditionally secured against the supplies that they are used to purchase. This means that, until the business is actually in possession of those supplies, the financier can’t issue the payment. The supplier, on the other hand, can’t take the risk of sending valuable supplies overseas without payment in hand.

To deal with this, businesses are typically required to pay a deposit to the financier up front. However, the value of this deposit is often so high that businesses can’t afford to pay it. Moreover, even if they can, that working capital is then out of reach until after the shipment arrives.

Fifo Capital offers a better kind of trade finance

Fifo Capital’s trade finance deals with this problem by giving businesses the opportunity to also finance their deposit. That deposit payment can then be secured against an outstanding invoice or other asset instead of against the stock being purchased. This way, businesses can purchase supplies without investing any of their own capital up front.

This type of trade finance facility is designed to help businesses to fully finance their operations. Because of this, payment on this facility can then be deferred by up to 150 days. This gives businesses the time they need to import supplies, process them, and sell them to customers. Some businesses, though, have cash conversion cycles that exceed 150 days, while others might face cash flow interruptions that could still destabilise their operations. In cases like those, invoice finance provides additional support.

Use invoice finance to fully finance your operation

Invoice finance is an additional financing tool that businesses can use to bring in revenues more quickly. Instead of waiting for an outstanding invoice to come due, you can finance an invoice to receive most of its value in an up front payment. The financial institution accepting the invoice will then go on to collect payment from the customer, and issue the remaining funds, less their fee, when that payment is received.

This allows businesses to quickly get access to additional cash when they need it, making it an excellent way to deal with cash flow interruption before they can impact operations. Moreover, it can be used to finance invoices as soon as they are issued, so that the majority of revenues are made available at the point of sale rather than whenever payment would otherwise be due. This way one can, for example, offer customers a 30 day payment term, while still receiving most of the outstanding funds immediately. Provided that the business takes no longer than 150 days to convert a supplier purchase into sales, then, the business can reduce its cash conversion cycle below zero, meaning that it will be paid for its products before it needs to pay for the inputs that created those products.

Fifo Capital’s trade finance and invoice finance can be used together to fully finance a business’ operations, and to manage cash flow interruptions. This gives manufacturers and wholesalers the control over their cash flow that they need, enabling them to grow, and protecting them from harmful interruptions that still jeopardise the success of so many businesses.

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