When more expensive costs less:

Each business has its own variant of cost versus value, but occasionally we are thrown a case so clear cut that it doesn't need justifying. And so it was here...
The customer had been running for 2 years in a great niche market, importing dried foodstuffs under agency from the US manufacturer.

The goods were imported by the container load from Dockside US (FOB), and about 3 weeks later arrived in our clients warehouse near Heathrow.

They were then drawn down by just 3 blue-chip clients over a period between 2 - 7 weeks.

A quality factoring company bridged their cashflow between drawdown and payment 60 days later.

So far so good; there were a few hurdles, however.

• Whilst the factoring facility was competitive and well priced, it had a 'concentration limit' of 30%. This means that they will only advance against up to 30% of debtors against any one client. With the usual spread of debtors this seldom matters - with just 3 clients it meant that they could never fully utilise the facility (unless all 3 ordered equally - which never happens).
• There was a factoring charge based on 1.5% of turnover. Not bad, and potentially useful, except that the 3 clients were exceptionally reliable payers so this really was dead money.
• The biggest hurdle was ensuring that they never run out of stock - as this would risk losing a customer. This means investing in stock which is a heavy drain on cashflow.

Dealing directly with a decision-maker, we were able to rapidly put in place a facility addressing these key issues.

• Purchase finance enables them to fund additional stock and avoid the risk of unfulfilled orders/ loss of clients.
• Whilst the headline rate was higher, the sales finance was agreed on Confidential Invoice Discounting, which means that the end customer was unaware of the arrangement and the client saved unnecessary collection fees - ultimately the facility was significantly cheaper!
• There are no concentration limits, so the client gets up to 90% of monies owed, not 90% of some of the monies owed.

Inevitably the incumbent factor had a notice period. The customer had the choice to run out the notice or buy their way out,,

They were so happy they chose the latter!

ABOUT:

Mark Jones has spent 25 years in the commercial lending business

His aim is to be blunt but helpful in his advice on funding matters.

Call him on 07932 075 754

or email