An Introduction to Stock Finance

Finance that directly increases turnover & profitability

With old forms of finance changing, obsolete or unobtainable, one business sector is in pole position to benefit from new forms of business finance.

That sector is the stock-related business, those of which exist as wholesalers, retailers (including eBay shops), importers, exporters, manufacturers or distributors.

An emerging form of finance, stock finance (secured against stock held or secured against stock in the process of being purchased), is proving increasingly popular within these sectors, for the numerous business benefits it provides.

It allows stock related businesses the ability to capitalise immediately on new business opportunities, manage growth in a confident manner, to dream big, and ultimately, it directly results in the delivery of improved profitability.

This article discusses:

The challenges of the stock related business environment

The current funding status quo

What stock finance is..

What it actually does for a business..

How it directly delivers increased turnover and profits, and...

How you can access this finance quickly.

The 6 hard truths for businesses buying Stock

A serious drain on cash flow

Any business that buys, sells or holds stock will know 6 hard facts:

Truth 1.  Buying stock from suppliers costs a lot of money

Deposits are usually 30% to 50%, with the balance shortly after, with some even requiring 100% upfront payment.

Truth 2.  A business needs to hold stock so orders can be fulfilled quickly

Most businesses use customer service as a USP, and a fully stocked warehouse is needed to deliver on that promise.

Truth 3.  Holding stock costs a lot of money

There is the direct cost of storing stock in an owned or leased warehouse, and also the indirect cost of the stock sitting idle and not being sold for a period of time, thereby tying up capital.

Truth 4.  Buyers of stock do not pay as quickly as you would like (regularly)!!

Invoices can be anything up to 120 days, and longer.  Large corporate buyers often tend to be the longest, and due to the size of their outstanding invoices, the delays in receiving those funds can cripple a business.

Truth 5.   Alongside wages, tying up capital in stock drains cash flow and can have negative long-term consequences

Even profitable businesses can find their businesses in trouble if too much cash is tied up in stock.  Particularly at risk are businesses quickly increasing their order book and growing at a fast rate, or dealing with large but slow corporate buyers.

Truth 6.  The decision to use funds to buy stock means those funds cannot be used for any other purpose.

The business has to forgo hiring new staff, or conducting an advertising campaign, if choices need to be made.  All of which slows the progress of the business.

Common stock-related business situations 

As a result of these hard truths, three common situations present themselves to these types of businesses, all resulting in lower turnover and profitability:

1.  The most typical is that the cash is not available to buy new stock, because sales revenue has not yet come in from previous orders, and this seriously hampers business growth.

2.  The next most typical is cash is not available to do some other desirable business activity, like hiring staff or launching an advertising campaign.  Meanwhile, revenue is outstanding from multiple sales orders and a ton of stock is sitting in a warehouse, the value of which is not being fully utilised.

3.  However one the most tragic situations is when a business does not have the confidence to chase big contracts it could win, because the cash is not available to ensure enough stock is in to service the orders.  As a result, long-term turnover and profit figures remain much lower than they could be.

I’ve spoken to numerous clients who view chasing big contracts as a disaster waiting to happen to cash flow, and as a result do not accept opportunities to grow such as tender invitation.

It is not uncommon for a large contract to require 6 months of stock held upfront, on call, with no guarantee of when the stock will be bought.  What a drain on cash flow! So the inability to service these sorts of contracts is a really sad position to be in.

A business that should be accelerating, confident and excited about its future, is instead fearful of going out of business because dreaming big could kill cash flow terminally.  The result is many of these businesses shy away from deals it knows it could, and should, be clinching and servicing.  They remain with much lower turnover and profit figures as a result.  It doesn’t have to be this way, as I’ll show later.

So where are the banks in all this? 

Not doing very much!

The banks right now will not provide stock finance, even if they say they do.  Long delays in getting decisions means they are not going to do it.

Banks will only provide ‘stock finance’ if they can secure the funds against commercial property (which essentially means your business gets a commercial mortgage, not a stock finance facility).  If your business does have unencumbered property, it is a possible route to go down, and the cheapest.  However, the process takes anywhere between 3-9 months in today’s market, and is not a product your business can get access to quickly to seize immediate opportunities.

A commercial mortgage is also a) a fixed amount of capital injection based on the value of the property, (i.e. once you’ve used it up, that’s it) and b) requires constant monthly servicing, regardless of peaks and troughs in sales.

This is not the same as a continually renewing facility based on each transaction.  As a result, less money is available from a commercial mortgage over the long-term than a stock finance facility.

Overdrafts are the most common banking solution, but these are becoming increasingly difficult to maintain.  Numerous banks are conducting reviews, and it is common for overdraft facilities to be halved in the current climate.  This only adds further damage to cash flow.

So for stock related businesses like importers, distributors, wholesalers and retailers, stock finance is an exciting opportunity to utilise capital more effectively, which can result in improved turnover and profit figures.

So what is stock finance?

Stock finance is simply one of two arrangements:

a)    a lender pays your suppliers for your stock purchases so your business doesn’t have to (UK or internationally, also known as purchase finance, import finance, export finance or trade finance), or

b)   a lender injects capital into your business, secured against stock you already own and are holding (also known as inventory finance)

The lender takes a view on your ability to repay, based on your product margins, the purchase and sales cycles, and the current level of orders coming in, confirmed or otherwise.

The lender is then repaid one of 3 ways (each case differs):

1. Funds are received by the borrowing firm from direct sales

2. Funds are paid direct to the lender by the firm’s customers

3. Funds are paid out from any invoice finance facility in place

These are typically short-term, but revolving facilities, running for 60-120 days, and then repeated as is necessary.

What does stock finance actually do for a business?

This finance product directly impacts the confidence of the decision makers, the strategy, the future actions of the business and ultimately the profit levels.

It improves the financial outlook of the business, and the confidence levels of the Directors/Owners.  Where previously opportunities slipped by due to lack of stock and a lack of confidence in fulfilling contracts, stock finance gives Owners the freedom to dream big (read our testimonial from InterConnect as a demonstration).  They are now able to chase game-changing contracts, confident in the knowledge that the stock can be purchased and paid for, whilst new orders are fulfilled.

The business gets back control over its capital, has more power over its use, and creates a new situation where other options can be considered for re-allocating and deploying this newly freed-up capital.

For example, the business is now able to decide if it wishes to keep this capital in the bank, or hire new staff.  It may need to pay some outstanding bills, or would really like to launch an advertising campaign.

It allows businesses to access capital quickly.  Turnaround times to put a facility in place are usually 3-4 weeks and can be quicker if required.  It means the business can react quickly to new income opportunities that come its way.

Most importantly, for all stock related businesses, it allows the business to continue into the future with confidence knowing potential future cash flow issues can be dealt with.

When is stock finance considered?

Stock finance can be considered a viable solution when:

The business is experiencing rapid growth which is using up a high proportion of working capital.

The business is trying to win big contracts, but the capital is not available to buy in the required level of stock

The business has no available assets other than stock

The business has been refused finance by banks, or are experiencing reductions in overdrafts or long delays

The business has a commercial property, but already has a mortgage

The business has adverse credit, or urgent bills to pay

The business simply wants to be well prepared for the future, should unexpected cash flow issues arise.

What are the advantages of stock finance?

There are some interesting advantages to using such a facility:

Far higher levels of capital are available to the business compared to traditional secured business loans.  Traditional business loans tend to be fixed amounts, that once spent are done.  The revolving nature of stock finance facilities means they can be used again and again.

You are not charged if you are not using the facility.  You are charged per transaction, meaning you only use it when it is necessary.  With business loans, you are charged monthly regardless.  As such, it is a Pay As You Go/pay as you need style arrangement. It is short-term as-and-when you need it, and ideal for the peaks and troughs of most businesses.

You don’t need to be a gold plated business to get approved.  The lending criteria differs somewhat from the banks.  You don’t have to be a highly profitable business because the funders do not require repayment from the net profit; it is out of incoming sales revenue. As long as orders are happening, likely, or confirmed, repayment to lenders is possible.

By paying for the orders upfront, it is possible to negotiate discounts, thus improving the margins and ultimately further improving the overall bottom line.

Who provides stock finance?

There are a small group of select financiers operating in this sector, who typically do not advertise themselves. To access this funding quickly, engage a non-fee charging commercial finance specialist who has already developed these relationships, who you can quickly access.  This action saves businesses time, money and delivers directly to your bottom line.

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