Funding Growth From the Balance Sheet

Invoice finance, asset refinance and asset-based lending are often talked about as tools for businesses in trouble. They are just as useful for a business that is doing well and has more work than its cash can support. Winning a large contract, buying a machine to bring work in house, or holding more stock to serve a bigger customer all need money before the money comes back. The assets already on the balance sheet can often provide it, provided the case for growth stands up.

Why growth eats cash

Growth is one of the most common reasons sound businesses run short of cash. A new order means buying material, paying wages and running machines weeks or months before the customer pays. The bigger the order, the bigger the gap. A business that is profitable on paper can find itself unable to pay suppliers because the profit is tied up in work in progress and unpaid invoices.

That gap is predictable, which means it can be planned for. The mistake we see most often is taking the order first and thinking about funding afterwards, when the options are fewer and the terms worse.

Matching the finance to the need

Different growth needs suit different kinds of finance.

• A new contract. If the main pressure is the time between raising invoices and getting paid, invoice finance grows with sales and is usually the natural fit. If the customer pays in stages, or holds back retentions, check early how a lender will treat those invoices, because many will not lend against them in full.
• A new machine. Hire purchase or a finance lease spreads the cost over the working life of the asset, with the machine itself as security. If you already own plant outright, refinancing it can raise the deposit or fund the installation, tooling and training that the finance agreement does not cover.
• Working capital for bigger orders. Where you need to carry more stock and more debtors at the same time, an asset-based lending facility can combine both and move with the size of the business.
• Property. If the business owns its premises, a commercial mortgage or, less often, a sale and leaseback can release a larger sum for a step change such as an extension or a second site. These are long-term commitments and need to be judged as such.

Whatever the route, match the term of the finance to the life of what it pays for. Funding a machine that will run for many years with short-term money puts unnecessary strain on cash.

Building a case a lender will back

A lender funding growth wants to know three things: that the opportunity is real, that the business can deliver it, and that the money will come back. A good case answers each directly.

Show the opportunity is real. A signed contract, a purchase order or a letter of intent from the customer carries far more weight than a forecast. Set out the volumes, the prices, the payment terms and the length of the commitment.

Show you can deliver. Lenders worry about businesses that win work they cannot make. Explain where the capacity comes from: the machine, the shifts, the people, the supply of material. If the customer requires approvals, such as AS9100 certification or a first article inspection, show that you have them or a realistic plan to get them. Our step-by-step guide to AS9100 certification covers what that involves.

Show the money comes back. Build a monthly cash flow forecast covering the full period of the contract or the payback of the machine. Show the peak funding need, when it occurs, and when the facility starts to reduce. Include a downside case with lower volumes or later payment. A lender is more reassured by a forecast that has been tested than by one that only shows the best outcome.

Show your house is in order. Up-to-date management accounts, a clean and well-managed debtor book, and accurate stock records tell a lender the business is run properly.

Common pitfalls

• Overtrading. Taking on more work than the funding can carry.
• Underestimating the extras. Machines need installation, foundations, tooling, programming and training. These costs are easy to miss.
• Pricing that ignores finance costs. The cost of the facility belongs in the price of the work. If the contract only makes money before finance charges, it does not make money.
• Too much reliance on one customer. Lenders will reduce what they advance against a highly concentrated debtor book, and so should your own appetite for risk.

Start early

The best time to arrange growth funding is before you need it, while the accounts look healthy and you have time to compare lenders. If you are bidding for a large piece of work, start the conversation with funders at the same time as the bid. And if the business has already started to feel the strain of growth, our article on the early warning signs of business trouble is worth a read.

We help owner-managers build the forecasts and the case for growth funding, and introduce them to suitable lenders through our finance sector network. To find out more, see our turnaround and finance services or get in touch.