Businesses face a broad range of challenges when it comes to successfully growing and scaling to challenge larger competitors, and to break into new markets. Successful expansion is impossible without stable suppliers, solid marketing, a well-designed growth-plan, good timing, and, most of all, strong financial backing.

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Many business owners focus on either business loans or investor backing as a way to fund their growth strategy. To maximise the amount of capital a business can raise, however, it’s best to use all the tools at your disposal to apply as much of your business’ own capital as possible, while also securing better loans, and a larger pool of potential investors. Using supply chain finance and other off-balance sheet financing tools, you can improve your working capital position, and provide your business with more funding options and greater financial security.

Supply chain finance improves your business’ working capital position

Unlike other types of financing, supply chain finance is off-balance sheet, meaning that it doesn’t involve taking on any new assets or liabilities. Despite that, it can help businesses to access working capital that they otherwise wouldn’t be able to use.

Modern businesses normally all operate using the same simple process as any commercial entity has throughout history. They purchase inputs—labour, materials, space, and equipment—and use them to produce products or services, which are sold for profit. In order to operate, the business first needs to be able to purchase those inputs. Supply chain finance, along with other off-balance sheet tools, allow businesses to invert this process. Instead of paying for inputs first, the business produces and sells products and services, before collecting its revenues, and only then paying for its inputs.

How it works

Suppliers, for their part, can’t afford to spend months waiting for payment. This is where supply chain finance comes in. The purchasing business works with a financier, who provides timely, or even early payment to the supplier. Then, up to 90 days later, the business pays the financier, effectively extending a 90 day payment term to itself. Businesses who need more time than this can then also accelerate payment from their own clients using another off-balance sheet financing tool: invoice financing. The result is that businesses no longer need to keep working capital on hand to pay for inputs up front, because operations will effectively begin to pay for themselves.

Using supply chain finance to lower supply costs

Besides improving your business’ working capital position in this way, supply chain finance also inherently stabilises supplier payments, effectively guaranteeing that suppliers will always be paid on time. This is a major benefit in itself, and businesses can use it to negotiate with suppliers for lower pricing. Moreover, Fifo Capital’s supply chain finance facility allows suppliers to request early payment in exchange for an additional discount, which can lower the business’ supply costs further, while improving the supplier’s working capital position as well.

Lower debt to equity ratios lead to better funding options

Regardless of whether the business decides to use those newly accessible funds to invest in assets or to pay down existing debts, its debt to equity ratio will be improved. This means a better working capital position overall, which has important implications for the business’ future.

A low debt-to-equity ratio communicates to both potential investors and lenders that the business is in good financial health. As a result, it’s easier to qualify for loans when you need them. More importantly, it makes it much easier to attract investors, which can have enormous consequences for the future of your business.

Getting the right kinds of investors

For a business that’s still relatively new, it can be tempting to take on the first investor that comes in the door. While that might be the best and only option for some businesses, it’s a situation that’s usually better avoided. Every investor is unique, just as every business and every entrepreneur also are. Ensuring that your business’ balance sheet reflects its solid financial health is an important tool in attracting enough investors to provide the luxury of choice.

Besides this, more potential investors inherently translate to greater negotiating power. One, or just a small handful of potential investors know that you have few other options, so they can effectively name whatever terms they like. The more investors you can attract, the more selective you can be with regard to choosing partners who share your overall vision, and who will commit to seeing it through without seriously compromising on your own goals.

By understanding and leveraging all the financing options available to your business, you can transform your financial position to enable faster and more sustainable growth. This is both because of the direct access to funds it offers, and the secondary effects it has on your business’ relationship to its investors and lenders.

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