Tom Baker’s company is an extreme example of the cash flow challenge faced by growing businesses. Its products are in demand for just a few weeks a year and so the problem is even more acute – but it encapsulates the chicken and egg scenario.
“We don’t have much turnover between January and August – it’s a straight line,” says Baker. “Then we start delivering like mad, but unfortunately our customers don’t like paying within 30 days – it’s usually nearer 90. They’re keen to start receiving goods in September, but are unwilling to pay until December. This leaves us with a large gap between paying both our overseas and raw materials suppliers before we receive payment from our customers.”
When Baker launched the company, which now employs 35 people, he tried the obvious route of bank funding. But as is the case for many growing businesses, the company was considered too high risk to get the overdraft facility it needed.
“A turnover of £2m isn’t particularly well supported by an overdraft of £30,000, which was all I was offered.”
The answer to his problem was to look to invoice finance, in the form of factoring, in order to get the cash he needed for his company’s growth. “Our factor has been flexible, understands our business and works with us,” says Baker.
The arrangement is simple. The company is advanced 85% of the total of its invoices as soon as they are raised. His factor then takes on responsibility for collecting the money, saving him the need to chase the invoices. Once the debt is settled, the remaining 15% of the invoice value, less a service fee, is paid once payment is received. All but 1% of his invoices are covered.
Baker claims the Creative Christmas Company has been able to grow much faster than it would have done without the benefit of factoring. Last year turnover increased 25% on the previous year. “I’m currently sitting on £1m of stock, we’ll turnover £2m and will spend £500,000 in the next few months – thanks to factoring."
Baker acknowledges a lingering belief that factors are seen as a last resort funding route, but says this only applied to a minority of his customers. “The perception that factors work only with companies who are about to go down has changed a lot,” says Baker. “We still have a couple of customers who refuse to work with a factor, but most of our customers are happy and respect the professionalism in the industry.”
Seasonal companies aren’t the only businesses who turn to invoice finance for growth. Recruitment is an industry that commonly struggles to manage the gap between paying temporary workers who demand weekly wages from agencies, and clients who often take months to pay.
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