By Chris Mould, Audit and Assurance Partner in the Cheltenham office of national audit, tax, advisory and risk firm, Crowe.
Growing a manufacturing business isn’t a simple journey. There can be significant steps up in volumes and trading rather than a smooth curve. The finance journey is similar and there may never be a final arrival point. Every manufacturing business needs to be appropriately financed to support its growth. Get this wrong and it can impact on profitability, restrict growth or even cause a business to fail. There is no funding “one size fits all”. Consider the structure of your business and the options available. The first step in any decision-making process on significant funding changes is to produce a business plan. This is likely to be required by debt and equity funders and it will also help you to fully think through your business ambitions. There are lots of funding options available. Take advice – a small percentage of the funds raised paid in fees can make huge differences to your business in the future.
Funding by tightening internal cashflows
The phrase ‘turnover is vanity, profit is sanity, cash is a reality’ is truer in times of uncertainty. There are simple steps available to most manufacturing businesses to help maximise available cash and minimise the funding requirement. Understand and take control of the ins and outs and produce a weekly cashflow forecast. Examples include:
- Review stock and work in progress levels to reduce excess holdings
- Produce sales invoices as early as possible and review customer payment methods to shorten the receipt of funds
- Tighten credit control processes
- Review terms with suppliers to see if these can be extended
Debt comes in many guises and established manufacturing businesses will often use a blend of durations and forms in order to match cashflow requirements. The four main types being:
- Overdrafts and revolving credit facilities
- Finance secured on assets
- Fixed-income debt securities
It is not untypical to see a business with secured lending over large items of equipment (if they are not held operating under leases in the first place and potentially off-Balance Sheet under current UKGAAP), and invoice discounting over the debtor book.
Newer forms of finance
We are also now seeing other funding streams such as supply chain financing/ reverse factoring becoming more common. Supply chain finance or reverse factoring as a form of finance allows suppliers to take advantage of the credit quality of their larger customers. This is where a supplier receives finance in relation to their receivables (money for goods/services delivered) by a process started by the ordering company. It allows the supplying company to receive better finance terms than it would otherwise be able to receive from a lender. Traditional factoring works on the basis that a business receives finance on their receivables.
Conversely, reverse factoring (or supply chain financing) is where the buyer assists suppliers by financing their receivables using a more flexible method and at a lower interest rate than would be offered. As a proportion of the market, reverse factoring is less than five per cent per cent of the factoring market, but it is growing.
There have been government initiatives over recent years, each designed to get the debt markets working more efficiently. On a national scale these include the previous Enterprise Funding Guarantee programme but also now, under the British Business Bank, the ENABLE guarantees and funding programmes.
The ENABLE Guarantee programme is open to all UK banks and UK branches of foreign banks which lend, or intend to lend, to viable small and medium-sized enterprises operating in the UK. The British Business Bank has committed guarantees for live portfolios of more than £800 million under its ENABLE Guarantee programme (as at the end of October 2018).
ENABLE Funding is aimed at improving the provision of asset and lease finance to smaller UK businesses.