Keep the cash flowing
Just read a very interesting article (link below) which further highlights the importance of having an effective flexible working capital facility (see my previous article –The Asset Based Loan (ABL) as a Working Capital Solution) in place and how quickly a change in payment terms by a major customer can have a significant negative impact on the cashflow of a SME business.
Be wary of the big boys
It also highlights the fact that even though your business supplies to multinational companies, such as Kellogg’s or Fonterra; this does not necessarily guarantee security in a timely cash-flow to meet your business funding requirements. In Australia, Woolworths recently extended their payment terms as did Rio Tinto and Fortescue Metals. The Rio Tinto/Fortescue decision to also extend to 120 days had a significant impact on labour hire suppliers who require the cashflow to be able to pay their staff on a weekly/fortnightly basis.
Soften the impact
An ABL (Asset Based Loan) can soften the impact on a SME’s cash flow when faced with a customer’s decision like this which in most cases is without any forewarning. The ABL lender does have the ability to extend funding recourse terms from 90 days to 120 days ensuring minimal disruption to the business. If the SME is funding their working capital requirements with a traditional overdraft facility and there is no further available equity in the property securing the facility…
The business is left with a hole in their funding requirements which needs to be filled quickly.
Fill ‘er up!
If it cannot be filled quick enough, the business owner is faced with the highly probable snowball effect right down the supply chain where they will need to approach their suppliers for extended payment terms compounded with the difficulty in meeting ongoing statutory commitments. In the case of labour hire businesses, there is no room in asking staff/contractors if they will accept extended wage payments. Virtually overnight the business owner is distracted from the primary focus of growing and running their business to trying to fill a funding void which in many cases could result in the failure of the business.
An ABL facility provides the business owner the ability to be able to negotiate flexible payment terms with their customers as they know they will receive 70% – 90% of the funding within 24 hours of issuing their invoices. The flexibility in being able to offer extended payment terms just may be the deciding factor in a customer dealing with you or your competitor.
Original Article from Smart Company – Kellogg’s and Fonterra stretch payments to 120 days: The corporate giants putting the big squeeze on small business