How Inventory Finance Works for you!
If you are familiar with factoring, then Inventory Finance is a fairly easy concept to understand! Rather than providing finance on the basis of your customers ability to pay your receipts, Inventory Finance provides funding on the basis of your ability to pay your suppliers.
Put another way..............
Typically your suppliers will provide you with 14 to 30 days credit. You must pay for your supplies in full within this time frame, or risk suppliers refusing to work with your business. No supplies, no business....!!
That gives you 14-30 days to produce enough product or sell enough items to at least cover the supply invoice - let alone turn a profit. If you've been in business for any length of time, you would know how difficult this scenario is.
So what's this situation commonly referred to as........?
Well, this is called a 'cash' flow problem. The conundrum is 'when' you actually pay your suppliers vs 'when' your customers pay you, and only when you have produced, delivered & invoiced your customers.
OK then, what can I do about that?...........Well then, a relatively new financing facility called Inventory Finance may be the answer...........!!
If you could secure a finance facility that pays your suppliers 100% of their invoice & then extends 90 days credit terms (Line of Credit facility) to you, without the need for real estate security, this might work....!
Now, if your business turns it's stock in less than 90 days.............and as your Inventroy Financing facility allows sufficient time for your customers to pay you......then you should be able to turn a profit, even after financing costs......and then further grow your business with the increased sales.........and without the cashflow problem of the past..........
That sounds easy enough.......
More cash in your business means, less stress, more production, more sales.....& more profit.
Inventory Finance also means you can buy more from your suppliers, which should put you in a position to negotiate a deal for bulk orders and further savings on shipping costs as well.
Now Inventory Finance is not for everyone.......your business must be sound, profitable, trading for at least 2 years and other financial requirements need to be assessed along with access to your most recent financials.
However...............
Once your credit facility is approved, you can then draw on your credit facility time and again (it operates just like a Line of Credit) to provide the cashflow assistance many businesses crave.
To find out more and to identify if an Inventory Finance facility can work for your business, just call AMF on 1300 72 86 96 and ask for Richard Hicks to discuss further.
Here are the terms for the Inventory Financing facility;
- The provision of ‘additional lines of trading credit’ from AUD20,000 to AUD2,000,000. No need to shift existing bank facilities
- Handling orders from AUD10,000 to AUD1,000,000.
- Imposing no establishment, line or legal costs (other than out of pocket on costs)
- No charges over real property or company assets. Personal guarantees and interrelated company guarantees required, otherwise unsecured.
- The ability for the financier to deal with all prospect categories-wholesalers, importers, exporters, manufacturers, retailers, traders and dealers.
- Accepting applications for businesses that have been trading for over 2 years i.e. the business is established.
The Application process
- Lodge a completed application form plus two years Financials.
- Financier approves a revolving credit line with an agreed limit (subject to onsite inspection by the financier, just to makes sure there is a bona fide business operating)
- You sign the facility (financier) documents
- You then instruct the financier by email or fax to pay supplier(s) up to the limit agreed at any time
- The financier issues a bill to you including financier charges (to be paid 90 days later) and the financier pays out to the supplier(s)
It's really is as simple as that.
Inventory finance becomes the new black in loans
Certain small well-run businesses have much to gain by procuring early-stage inventory finance, writes Miriam Hechtman of the Financial Review.
Invoice discounting helps bring cash flow forward for the last phase of the cash-flow process: after the invoice has been sent to the client and the business is awaiting payment.
Another form of finance, relatively new and increasingly popular in Australia, is for lenders to advance money for inventory – that is, for stock that has yet to go out the company door.
Used in various hybrids with varying practices, inventory finance is designed for small businesses that are successful, profitable and growing. "These businesses have a clear credit history, good management and have generally been in business between three to five years."
“They’re companies that have reached as much growth as they can afford to by themselves, they have traditionally used everything that’s in their real estate and they’re looking where they can get the extra layer of growth,”
Inventory FInance can provide cash upfront for a range of business types, including for raw materials, boats, stationery, fresh fruit, works in progress, such as partially completed garments, and finished goods, such as electrical products.
Unlike other financing facilities, such as discounting and factoring, which cater for the last phase of cash flow, inventory finance is suitable for businesses that need the money immediately in the first phase of the selling process. The inventory [the stock] is financed right when the person actually buys it... then the financier makes the payment for them, to their supplier.”
After the client has paid for the stock, the financier is paid from those proceeds. Clearly, companies that are in trouble are not suitable for this type of financing.
Inventory financiers look at the company’s gross profit margin, which as a rough rule of thumb, must be 20 per cent.
The average is much higher, usually 49 to 50 per cent and that means that they’re making enough out of it, even after the financiers fee taking a modest proportion of that, to make sure that it’s still worthwhile.“ As opposed to interest, lenders takes a flat fee and clients determine the term of their fee, which can range from 30 to 90 days.
For customers, it’s the equivalent of saying, ‘here’s some additional turnover that you couldn’t have done through traditional lending or with your own capital. Instead of making 50 per cent gross profit margin you will make 45.’ And of course, this outcome leads to a very compelling argument to consider inventory financing arrangements.
The key benefit of inventory finance is the potential for growth. Clients can go back to their supplier and increase their purchasing power. It’s going to get them a better price. It’s going to save them on the freight, and also because they’re paying up front for that supply, they’re going to get a discount again.”
Additionally, clients are able to expand their customer base and take on bigger orders with less concern.
For one satisfied company owner, the product has certainly helped him grow his business.
“One of the problems you have with growth is that it costs a lot of money to grow and as you grow you might not have the money to do it. That’s exactly the position that I was in. These people (the financier) do it based on your business and you don’t need to have any bricks and mortar to put up or anything like that. They actually do it just on your figures and the state of your business.”
He also says there are a number of areas where this financing has helped, including being able to pay everybody on time. “All my suppliers are actually bending over backwards to supply to me because they’ve never been paid so quickly in the history of their business,” he says.
He also says that extra discounts from suppliers pay for part of the funding.
Inventory finance
• Inventory finance is designed for growing, successful small to medium sized businesses with a clear credit history and good management.
• Lenders advance money for stock that has yet to go out the company door.
• Inventory finance is suitable for businesses that need the money immediately in the first phase of the selling process.
Source: Financial Review / 6th March 2008 - Text edited to delete lender name. Comments by Mr Matthew Nolan.