You may require funding to grow your business – to buy more stock, take on additional storage, develop new product lines or ramp up your export trade.
In the final instalment of our blog series we outline a number of alternative options for financing growth.
Part 10: Merchant Cash Advances; Trade Finance; Stock Finance; Supply Chain Finance; Structured Finance
Whilst some of the alternative finance options below can be fast and flexible, a number are bespoke solutions and therefore the costs involved require a certain turnover level to be beneficial.
Professional advice should be taken to understand which products are suitable for your business needs at the time.
1. Merchant Cash Advances
Merchant Cash Advances are provided by finance companies and card payment companies.
Cash Advances are different to loans as one flat fee is charged, with no interest or other fees. Repayment is a fixed percentage deducted from future card takings, so is flexible according to monthly sales.
It provides quick, unsecured, temporary (up to 12 months) capital, based on credit and debit card revenue over past months, for any purpose.
Typically, providers offer up to 100% of average monthly card takings, some offer more.
A minimum monthly card turnover is required.
2. Trade Finance
Trade finance is used to facilitate domestic and international trade.
In International business and industries such as Construction, Manufacturing and Transportation, the time between purchasing and selling on receivables can be lengthy.
This creates risks for suppliers needing payment assurance, and for importers and buyers requiring proof of dispatch/work and finance to pay suppliers before these assets have generated cash.
Trade finance manages these cycles, providing flexible lines of credit with long repayment terms, enabling companies to confidently start new trade ventures.
Types of Trade Finance
Trade finance tools facilitate payments between buyers and sellers at different points in the trade cycle to ensure trustworthy, secure transactions.
The amount, cost and terms of finance depend on financiers’ perceived risk.
Banks generally have a lower risk appetite than non-bank lenders, and require property or equity as security.
Non-bank specialists provide diverse funding sources with more flexible terms and less tangible securities (such as purchase orders).
Purchase Order Financing
Provides businesses with working capital to fulfil large purchase orders – including paying suppliers – made by buyers who insist on credit terms.
It is repaid when the buyer pays the invoice for that receivable.
Unlike Factoring/Invoice Discounting (see https://brilliantbusinessblogs.com/2019/01/31/how-to-finance-business-growth-invoice-finance/) PO financing advances up to 100% against confirmed orders before an invoice is generated.
Letters of Credit
Trade financiers guarantee to pay suppliers’ banks on behalf of the buyers, once key export documentation (such as a bill of lading) are provided or conditions are fulfilled.
Financiers guarantee payment to suppliers when key contractual obligations (such as the dispatching of goods) are met.
Financiers pay suppliers as bonds mature when trade terms are achieved. Often used in construction projects.
For detailed Trade Finance information see https://www.export.org.uk/page/TradeFinanceGuide and https://www.bibbyfinancialservices.com/funding/invoice-finance-products/construction-finance
3. Stock Finance
Stock Finance differs from traditional working capital funding, Invoice Finance and Trade Finance, as it relates to the purchase of goods to sell on, which are not yet confirmed orders.
It can be used cross-border and domestically to finance buffer stock. Or employed in an industry not suited to trade finance, for example, when selling to individual consumers online.
For further information see https://www.tradefinanceglobal.com/finance-products/stock-finance/what-is-stock-finance/
4. Supply Chain Finance
Supply Chain Finance is powerful, when used well, in unlocking working capital trapped in supply chains. It is also known as Supplier Finance or Reverse Factoring.
It allows businesses to pay suppliers early for an early settlement discount.
Alternatively, it is used to pay suppliers on usual terms but extend creditor days, by repaying the facility at a later date.
5. Structured Finance
Structured finance provides major borrowers with an alternative, unique source of financing when traditional options are not suitable.
Structured finance involves complex, bespoke financial instruments (securities) created by combining individual ventures/receivables/assets to mitigate risk, for investment by investors with appropriate risk/return appetites.
Several products can be used to achieve the financing needs of large borrowers.
Structured finance products include: Syndicated loans, Collateralised Bond Obligations, Credit Default Swaps, Hybrid Securities and Collateralised Debt Obligations.
For further information see https://corporatefinanceinstitute.com/resources/knowledge/finance/structured-finance/