I meet a lot of businesses that are terribly disappointed with their Stock Finance facilities. Here’s some reasons why what they got from their lender, just didn’t match up with the expectations:
Business owners look at a warehouse full of the product they love and see £2M worth of invoices to future satisfied customers. Banks look as the same warehouse and see a hornet’s nest of problems and potentially obsolete, hard to sell products that might net them £300K in a fire sale. This is important because it does not matter what facility you signed (and paid arrangement fees) for, the stock financier will work out a ‘liquidated value, less a margin of safety’ and come up with 15% to 20% availability on gross stock. Meaning on your £2M, £300K is all you may get. They won’t say it as simply as this either, it will be dressed up in a high headline advance rate but with lots of ‘disallowable’ elements and ‘reserves’.
Lesson 1: Don’t expect the bank to advance more than 20% of your stock value, 15% might be more realistic.
Forget about the snappy “Base+2% interest” rate you’ve been quoted. Stock Finance is expensive for the bank to control and the total cost is far more likely to be driven by the fees they charge to cover these costs. For example, mandatory stock audits are often carried out by third party specialist companies and once these costs have been accounted for, you will likely to be paying north of 10% pa on the funds advanced. Oh, and don’t forget the hours your finance team will spend producing the reports that the bank will mandate.
Lesson 2: Calculate the true cost by adding in all of the fees and remembering to use a realistic advance rate.
3. Stock Finance in action
Good news, you’ve just delivered a large order and are ready to load the customer’s invoice into your bank’s system. The problem is, whilst the bank is happy to advance you 85% against the customer’s invoice, they may first want to look at what has happened to their stock asset. Before you know it, the reduced availability on your stock line, means the cash you need is no longer available to draw down.
Lesson 3: Stock and Debtors are linked, making cash flow planning difficult and unpredictable.
So what’s the alternative?
Trade Finance and Purchase Order Finance options have grown over recent years and for many businesses, they can provide a significantly better option than Stock Finance especially when combined with an invoice discounting facility.
Firstly, your Purchase Order Finance facility is fixed. If you have a £1M purchase facility, you can plan your cash flow in the knowledge that you have this to draw on. And this committed availability is especially important as you build up to peak trading times.
Then the costs for Purchase Order Finance are mostly variable, so you pay only for what you use, giving you much better control and allowing you to invest your money where it develops your business, rather than in fees.
Purchase Order Finance limits are calculated considering the value of the whole business, and not simply the liquidated value of your stock asset. That is, what your business is capable of repaying as a going concern and not what could be achieved in a liquidation fire sale.
So before assuming that Stock Finance is the most appropriate facility for your business, make sure you consider and research all of the alternatives.