Supply chain finance – your seasonal saviour?
How the construction and retail sectors can take advantage over the festive period – and into the new year, by using supply chain finance
Two sectors that are particularly affected by seasonal shifts in their variable costs – and revenues – are construction and retail, including e-commerce.
The team at The Business Finance Guide has spoken with some supply chain finance specialists to find out more about how this asset-based financing option can help businesses in these sectors thrive during the festive period.
1. The construction industry
Ask any construction contractor, and they will tell you that December is peak cash squeeze time.
Not only do clients typically close down over the Christmas period – meaning that their supplier ‘applications for payment’ won’t be processed in the usual time frame – but many of those same clients who have a December year end take the opportunity to improve the cash position on their public balance sheet by simply delaying all supplier payments.
This deferment of payment is commonly called “balance sheet dressing”. And for sub-contractors who have large December payrolls to meet, it can make managing cash flow in December decidedly un-festive.
Suppliers who have access to supply chain finance programmes provided by their clients are able to draw payments from their large customers early at reasonable rates helping smooth out seasonal peaks and troughs in cash flow, and remove stress.
Supply chain finance providers work with a number of businesses who have joined programmes specifically to give them an option at this time of year.
“At this time of year, we receive regular calls from sub-contractors in construction concerned about their cash flow over the Christmas and New Year period. Because the other finance options available in this sector can be limited, being part of their customer’s Supply Chain Finance programme can make a real difference, particularly to smaller sub-contractors”.
Mark Coxhead, Managing Director, Woodsford Tradebridge
Supply chain finance explained
Supply chain finance is a form of asset-based lending, also known as supplier finance or reverse factoring. Companies can use supply chain finance to improve cash flow by allowing businesses to lengthen payment terms to suppliers, while providing the option to pay important and SME suppliers and subcontractors early.
Put simply, the provider of supply chain finance will pay your supplier invoices on time, in exchange for charging your business a small fee, usually a % of the invoice value.
As a business, you may even be able to negotiate early payment discounts from suppliers or sub-contractors, which can be used to offset the cost of the credit line provided by the finance provider.
Terms vary significantly, with some supply chain finance companies charging for credit only when it is used.
This results in a win-win situation for the buyer and supplier. The buyer optimises working capital, and the supplier generates additional operating cash flow, minimising risk across the supply chain.
You can find out more about all forms of asset-based lending on this page of The Business Finance Guide, or visit the members section of the ABFA website for a full listing of member organisations.
2. Retail and e-commerce
Christmas is the time when many retailers book up to 90% of their profit for the year and the cash is rolling in.
However, every retailer’s nightmare is running out of their hottest stock in the middle of Christmas trading. This is a challenge because Christmas stock must be bought several months in advance. Commitment to purchasing stock usually comes at the point in the year where a typical retailers’ cash is at the lowest point of their business cycle: in August or September, just when the last quarter’s rent bill is due for many.
For those with own brand manufacturing, the commitment may have been made even earlier. The gap between purchasing or manufacturing stock, and generating revenue from that stock, can be huge.
Retailers are not able to take advantage of one of the most common forms of business finance in the UK – invoice discounting – for the simple reason that they have no customer invoices to discount. This is why having a blend of effective finance products is vital to help them make the most of Christmas.
“Getting the right finance in place for critical times of the year is a key part of the Retail Finance Director’s role, and good FDs are realising that having a portfolio of funding partners is often the best way to go”, says Mark Coxhead, an expert in supply chain and trade finance.
Purchase and supply chain finance can be an important part of the mix to help retailers defer paying for Christmas stock until the cash start rolling in.
“Our business is dependent on having the right stock at the right time in order to take advantage of the latest product trends. Having access to a supply chain finance facility allows us to negotiate better volume discounts and early settlement discounts, so as to generate additional margin.
“Our partnership with our supply chain finance providers has also given us the flexibility to repay on extended terms when required. They offer us a personalised service, and are very responsive to our needs”.
Patrick Leahy, Group Finance Director, John Mills Limited
Supply chain finance when the pressure is on: the January sale
All big companies have quarterly targets to hit, and in sectors such as food and beverage retail, there are often bargains to be had in January from the big manufacturers.
The problem is that if all your competitors are also buying cheap, sales prices get depressed so your retail business may not really benefit. Supply chain finance can help you take advantage of these discounts by allowing you to buy low in January and sell later when the prices have risen.
“Smaller businesses should never underestimate the pressure that their large suppliers are under to meet quarterly targets (I know, I worked in one for many years) … the trick of course is having the funding in place to take advantage when the pressure is on”.
“Ordering larger quantities or offering to pay early for discounts are just two ways you can profit if you have a funding solution such as purchase finance in place”, says Mark Coxhead, summing up the opportunity that January can offer to businesses with a strong cash position – or the finance in place to create one.
In the same way, supply chain finance or reverse factoring can allow retailers to take advantage of supplier discounts or surpluses at any point in the year, provided you have storage and the products have long expiry dates, of course.
Find out more information on asset-based finance, or visit the Asset Based Finance Association.