Our own Mike Lawrence, Business Development Manager, explains how Supply Chain Finance can help companies manage their working capital – and even reduce the cost of purchases.
Okay, so Supply Chain Finance may not quite be money for nothing, but used wisely it can certainly help companies obtain discounts on goods and services. It can also ensure availability of greater working capital for a healthier cash flow. It’s arguably a more sophisticated alternative to using factoring, invoice discounting or an overdraft – and you only pay for it when the facility is required.
Supply Chain Finance might be something you associate with big corporates, but it’s no longer the preserve of such organisations. It has now become available to SMEs provided they meet a couple of conditions – they need to have a turnover of £5m or more, must be both creditworthy and also insurable. It’s particularly suited to retailers and those importing goods, and companies are not always required to provide a Director’s Guarantee.
In a nutshell, Supply Chain Finance enables you to take advantage of cheap finance to negotiate discounts for early payment, either to increase gross margin or effectively extend the period of credit offered by a supplier so that working capital is increased.
Company A is looking to increase working capital by 30 days’ expenditure
They purchase goods worth £600,000 every month, on a 60 day settlement basis. After negotiating with their supplier, they agree to pay invoices on Day 1 in return for a discount of 5% (£30,000).
On Day 1, the Supply Chain Finance company pays the supplier £570,000 to settle the outstanding invoices, and in return Company A gives them a promissory note or a bill of exchange, agreeing to repay the Supply Chain Finance company in 90 days. This effectively gives Company A an additional month’s working capital, at a cost of around £21,375 (a typical rate is 1.25% per month).
The result is a net decrease in costs of £8,625 (£30,000 discount less costs of £21,375) and an increase in working capital of £600,000.
Company B is looking to reduce the cost of purchases
Let’s assume that the same figures apply as in the case of Company A – Company B also makes purchases of £600,000 per month and normally pays creditors on 60 days. They also negotiate a 5% discount (£30,000) for payment on Day 1.
The Supply Chain Finance company pays Company B’s invoices on Day 1, as before, but Company B opts to settle the finance at the same time it would normally pay its creditors – 60 days.
There is no increase in working capital, but the fees are lower than in Company A’s case – the cost of the finance is just £14,250. So bearing this in mind, as it’s set against the discount of £30,000, the reduction in cost for Company B is £15,750, which represents an increase in gross margin of nearly 2.5%.
To find out more about the benefits of Supply Chain Finance, please call Mike Lawrence on 01279 722555.