How invoice finance helped a manufacturing business
BEC Local Manufacturing is a manufacturing company that supplies specialist fixings to the plumbing industry. Their customers include a major buying group and a number of builder’s merchants.
Steve, the managing director, started the business in his garage 11 years ago and grew it to a £1.5m turnover through retained earnings. His accountant was constantly concerned at the level of capital expenditure required to meet demand.
For example, Steve reasoned that at £5k for a new machine and with a gross margin of 80%, on his fixings, he could recover this expenditure in a month and get a 5% growth in turnover.
In practice, demand for the product by the existing customer base actually suggested that 50% growth was easily achievable.
A major plumbing supplier then approached Steve to supply £35k per month of fixings, but with the stipulation that BEC Local extended their end-of-month terms to 60 days.
Although the pricing meant that margins on the business were currently 60%, Steve had a dilemma. He could turn away this business and rely on potential growth from his existing customer base which pays on average in 45 days, or take on this new customer at a lower margin.
His accountant advised that he could not finance all the business on the business’s overdraft and that he should avoid increasing capacity, which would come with additional capital equipment.
Steve did some research. Loathed to turn away any business, he wanted to be in a position to retire in 5 years and knew his product was in demand now.
Steve’s accountant had always counseled against too rapid growth, having seen many businesses fail through overtrading.
A friend of Steve’s then suggested invoice factoring as a solution and Steve decided to contact his friend’s factoring company. However when Steve visited the website of Touch Financial he was surprised to find indicative quotes from a range of providers that suggested much lower pricing than that of his friend’s factoring company.
He phoned the number on the invoice finance site to speak to an advisor, who quickly understood his needs and advised him on the most appropriate provider to meet his requirements. Steve was comfortable to accept the advice and within a couple of hours had made an appointment with a representative of the invoice discounter for a week later.
The representative met with Steve and his accountant and discussed both the opportunity for growth and the options for funding. At the conclusion of the meeting Steve was quoted for invoice discounting at 0.5% of turnover and 1.5% over base for a facility providing 85% funding with a limit of £500k.
A year later, the business achieved turnover of £2.7m and achieved net profits of £957k.
Three months after the year end, Steve received an offer of £4.2m for the sale of his company from the plumbing supplies multiple, which he is considering.
Also in this section:
Invoice Factoring Overview
Invoice Discounting Overview
Who is suitable to use invoice finance?
Invoice finance vs. business overdrafts
Factoring and invoice discounting buying guide
Invoice finance glossary of terms
