Most types of businesses go through predictable cycles, during which market demand and sales go up or down. The more extreme examples are those that do most of their business at just one or a few specific times of the year. Most retail businesses, for example, experience a spike in demand during the holidays. Outdoor service businesses, such as landscapers in temperate zones, are often forced to occupy themselves with irregular odd jobs during the winter months.
This inconsistency can have a profound impact on a business’ finances, and its ability to take advantage of growth opportunities. Due to the nature of the issue, businesses are always left with the least possible funds to invest at precisely those times when the greatest investments are needed. In order to maximise their growth potential, these businesses need working capital and cash flow solutions. For many, supply chain finance is the ideal financing tool for such a situation.
Seasonal businesses lack growth capital when they need it
A jewellery business can expect most of their sales to occur just before Valentine’s day, Mother’s Day, and the Holidays. During the rest of the year, sales will be relatively limited. If the business wants to drive growth, the best time to grow its selection would be immediately before one of these seasonal boosts in sales to capitalise on the increased traffic.
However, these times occur before any revenue boost occurs, and immediately after the business has just gone through a relatively long period of low sales. During that time, the business had to continue to pay for its space, employees, and security systems, often leaving them with relatively little to invest when the time comes to prepare for a big growth opportunity.
The same principle holds true for businesses of all kinds. They know that business will boom tomorrow but can’t prepare to take advantage without a critical injection of funds.
Payment terms and financing are difficult to secure
The obvious solution for many businesses is simply to borrow. Whether that means negotiating for long payment terms from a supplier or borrowing funds from their primary bank. Unfortunately, neither of these methods are particularly reliable. Suppliers are rarely willing to accept the risk of long payment terms unless they have no other options or have a long-standing relationship with a business.
Banks, for their part, are becoming increasingly conservative about issuing traditional loans, particularly to smaller businesses. This is due in part to the country’s decline in housing prices, as well as a generally slowing economy. With these options becoming less viable, businesses are discovering supply chain finance can provide the working capital they need to succeed.
Supply chain finance is ideal for cash-strapped seasonal businesses
Supply chain finance is specifically designed to extend payment terms to businesses who otherwise don’t have any. In doing so, it also ensures that suppliers are always paid on time and that businesses have the funds and the time they need to grow.
Instead of taking a loan from a bank, businesses work with Fifo Capital to pay suppliers indirectly out of a set credit limit, regardless of how much of their own working capital they have available at that time. This leaves them to use any funds they do have available to manage other costs, such as hiring casual workers to help manage the additional sales volume. Payments on the balance of the credit fund can typically be deferred by up to 90 days. This gives businesses plenty of time to stock up, and to get through the high season before any repayment is due.
Buying the time you need with invoice financing
Supply chain finance allows businesses to maximise the number of products or services they can sell while demand is highest. In some cases, however, businesses might not be able to collect revenues at the point of sale, which can interfere with their ability to pay down the balance on their credit limit. If revenues can’t be collected before payments are due, Fifo Capital offers other tools that can help them get their hands on the needed cash.
Invoice financing allows businesses to collect a major portion of an outstanding payment early, by trading in an outstanding invoice. Fifo Capital then issues the majority of the value of the invoice up front, before collecting the payment from the client on their own. Once that’s done, the rest of the funds are paid out.
Alternative finance tools like these are becoming increasingly important for businesses of all sizes to help manage seasonal shifts in demand, and to maximise their growth potential. By harnessing, and applying these tools properly, businesses can accelerate their growth, and become more competitive.