Inventory finance becomes the new black in loans
Australian Financial Review - SPECIAL REPORT - FACTORING AND DISCOUNTING
Certain small well-run businesses have much to gain by procuring early-stage inventory finance, writes Miriam Hechtman.
Invoice discounting helps bring cash flow forward for the last phase of the cash-flow process: after the invoice has been sent to the client and the business is awaiting payment. Another form of finance, relatively new and increasingly popular in Australia, is for lenders to advance money for inventory - that is, for stock that has yet to go out the company door.
Used in various hybrids with varying practices, inventory finance is designed for small businesses that are successful, profitable and growing, says Matthew Nolan, managing director at Provident Cashflow. These businesses have a clear credit history, good management and have generally been in business between three to five years. “They’re companies that have reached as much growth as they can afford to by themselves, they have traditionally used everything that’s in their real estate and they’re looking where they can get the extra layer of growth,” he says. “One option is us.”
Provident provides cash upfront for a range of business types, including for raw materials, boats, stationery, fresh fruit, works in progress, such as partially completed garments, and finished goods, such as electrical products. Unlike other financing facilities, such as discounting and factoring, which cater for the last phase of cash flow, inventory finance is suitable for businesses that need the money immediately in the first phase of the selling process. “We finance [the stock] right when the person actually buys it,” Nolan says. “We make the payment for them to their supplier.” After the client has paid for the stock, Provident is paid from those proceeds.
Companies that are in trouble are not suitable for this type of financing, says Nolan. Provident looks at the company’s gross profit margin, which as a rough rule of thumb, must be 20 per cent. “Our average is much higher, 49 to 50 per cent and that means that they’re making enough out of it, even after our fee taking a modest proportion of that, to make sure that it’s still worthwhile,” Nolan says.As opposed to interest, Provident takes a flat fee and clients determine the term of their fee, which can range from 30 to 120 days with 30 days equalling 3 per cent. Says Nolan: “For our customers, it’s the equivalent of saying, ‘here’s some additional turnover that you couldn’t have done through traditional lending or with your own capital. Instead of making 50 per cent gross profit margin you will make 45.’ Naturally enough, they all say yes.”
The key benefit of inventory finance is the potential for growth. “Clients can go back to their supplier and increase their purchasing power,” Nolan says. “It’s going to get them a better price. It’s going to save them on the freight, and also because they’re paying up front for that supply, they’re going to get a discount again.” Additionally, clients are able to expand their customer base and take on bigger orders with less concern.
Nolan says inventory finance is a “massively growing industry” and claims Provident owns the industry in Australia. “We are the Australian inventory financier,” he says. “We started the product. There was no-one calling it inventory finance until we launched it three years ago and we dominate that market.” The company is growing around 340 per cent per annum and since August 1, 2007, the number of clients has increased by 70 per cent.
For Easy Flow Guttering managing director Paul Axton, this product has helped him grow his business. “One of the problems you have with growth is that it costs a lot of money to grow and as you grow you might not have the money to do it. That’s exactly the position that I was in,” says Axton. “These people do it based on your business and you don’t need to have any bricks and mortar to put up or anything like that. They actually do it just on your figures and the state of your business.” Axton says there are a number of areas where this financing has helped, including being able to pay everybody on time. “All my suppliers are actually bending over backwards to supply to me because they’ve never been paid so quickly in the history of their business,” he says. Axton says extra discounts from suppliers pay for part of the funding.
Although it is still an emerging product category in the debt financing industry, St George Bank’s head ofcash flow finance, Brendan Green, says inventory finance is growing. “There’s a lot of growth opportunities out there and cash flow is required to fill that growth, so I think we’ll see a lot more of it over the next few years.” The bank’s two-year-old product, Invoice Discounting Plus, was introduced to cater to clients who had a lot of value caught up in their inventory. “We recognised that there was a lot of value in that inventory and the cycle is that cash turns into inventory turns into receivables,” Green says. “So I think there’s a real role to link inventory finance in with invoice discounting and that way you’re funding a bigger part of the client’s cycle.”
Inventory finance·
- Inventory finance is designed for growing, successful small businesses with a clear credit history and good management.
- Lenders advance money for stock that has yet to go out the company door.
- Inventory finance is suitable for businesses that need the money immediately in the first phase of the selling process.
