The Businessman’s common dilemma – “How can I improve my Cash Flow?”
The answer may be far easier than you think, even if your Commercial Banker has said that he cannot assist you further.
Invariably Commercial Bankers are very conservative anyway and they do not think further than offering you an overdraft that more often than not does not help YOUR growing business.
Then someone starts talking about discounting your invoices that are due and payable at dates in the future.
Actually this is a very good way to raise Working Capital for your business because:
As the Financier pays you out for ALL your invoices, your business already is ‘in the money’ so to speak to enable you to pay all YOUR creditor accounts on time, to the tenets of the terms stated in the invoices by your Suppliers.
What a boon to you is that?
But not only that, because the Financier buys your invoices on an ongoing basis you will find that you have enough money to pay your wages on time, every time and have money left over to keep the roof over your head and feed, clothe and educate your family!
As A Buyer: How Can Invoice Discounting Help My Cash Flow?
The Buyer’s Great Dilemma!
Let’s see what we can do to help him!
What Mr. Buyer needs to do, figuratively speaking, is to pile up all the invoices that require to be paid (his Creditors) and take them to a specialist Financier and ask him, “Sir please won’t you buy these invoices from me, and pay all these Suppliers who are pestering me for payment? – Then what I will do is that I will pay you in 60 days time, once all my Debtors (those that owe me money) have paid me?”
The Financier thinks about it, likes the Buyer and decides to help him by buying the pile of invoices off him!
What happens here is that a ‘financial load’ has been taken off Mr. Buyers shoulders.
The Financier simply pays the Buyer’s Supplier invoices, and the Financier waits for Mr. Buyer to pay him in 60 days time, as agreed!
So what has happened here?
Mr. buyer’s Cash Flow has received a shot in the arm, and all his suppliers have been paid.
Mr. Buyer is certainly a happy chappie! – Because his Cash Flow problem has been alleviated entirely, and he is ‘in funds’ so to speak to continue his business effortlessly.
Mr. Buyer has the money to pay his wages on time.
Mr. Buyer has the money to keep the roof over his head, to feed, clothe and educate his family.
Just because he, Mr. Buyer thought about the Invoice Discounting financial service.
Back to reality
Mr. Buyer could well be aware that certain of his Suppliers were Discounting their invoices due and were paying him on time every time.
Yes, Mr. Buyer could have considered doing the same thing, he could Discount his Debtors in the same way, raising Working Capital ust as some of his suppliers are doing.
The Financier, in this instance has had a choice, he could simply Discount the invoices that are due to the Buyer, or, he could have purchased the buyer’s invoices due.
Summing up
This article shows how flexible Invoice Discounting really is. It all depends how the Financier wants to proceed as he sought to help Mr. Buyer and what Mr. Buyer thought was the in the best interests of his business.
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It is just true to say that many businesses are not even aware what Invoice Discounting is, never mind how this financial service can help any importing, manufacturing business dealing with the distribution of goods and services.
In this presentation we will just focus on what Invoice Discounting is in the concept of Modern Working Capital Techniques.
To help us we need to understand a few basic terms that are in the glossary below.
Glossary
Invoice: The document that covers the delivery of goods and services to creditworthy buyers as they move from Supplier to Buyer.
Copy Invoice: Is an electronic copy of the Invoice that flows through the Modern Working Capital Management system to create the Working Capital that a Supplier would seek.
The Financier: This could be a Division of a bank or specialist Finance House that provides this kind of finance.
Non-recourse Discounting: Here the Financier takes all the risk in the financing transaction.
With Recourse Discounting:
Here the Financier has the ability, as expressed in the Invoice Discounting Agreement, to seek payment from the Supplier should the Buyer fail to pay the invoice due on the stated date.
Retention Account: This is the amount retained by the Financier as he finances the transaction as a part safety net pending the Buyer paying the amount due. The Retention Amount is repaid to the Supplier, less the Discounting Fee and Interest Due, as the Buyer settles the transaction.
Elements of Cost
The Discounting Fee:The Financier will make a charge in for arranging the Working Capital that is being provided.
The Interest Component: This amount is calculated on the number days that the invoice will remain unpaid at prevailing Interest Rates for transactions of this nature.
These cost elements are not excessive, and the reasons for paying them are far outweighed by the benefits that a business gains in raising Working Capital in this way.
The Procedure
The easiest way to understand the procedure adopted in the process of raising Working Capital in this way is by studying the graphic below and understanding the comments under it:
The 1st Step is for the Supplier load all his unpaid invoices up onto the system. This is very easy to do electronically today. (In the old days this was a manual clerical chore!)
The 2nd Step is that a copy of all future invoices that are raised will flow into the Modern Invoice Management System so raising ongoing Working Capital for the business.
The 3rd Step is that the Settlement Platform contacts the Buyer to ascertain that the invoice is genuine, and due for payment. The Platform also ascertains the date that the Invoice will be paid and the bank current account that will be credited with the amount due. This bank account can, in need be controlled by the Financier.
The 4th Step is that the Platform after receiving the confirmation validating the transaction then prepares the invoice to be offered to the Financier who can chose whether he wants to finance the transaction or not. In addition, in need, the transaction can be insured.
The 5th Step – If the Financier decides to finance the transaction he debits the facility account in his books and credits the Supplier with the proceeds of the transaction less the Discounting Fee, Interest and the amount to be withheld in the Retention Account.
The 6th Step – The Financier now waits for the Buyer to effect payment on the due date to the credit of the bank account stipulated. On receipt of this payment the Financier returns the balance that he holds in the Retention Account to the Supplier that would be less Discounting Fee and Interest charges.
The 7th Step is to stand and look in awe as to how this Modern Working Capital Management System has worked to provide Working Capital to the Supplier!
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A Quick Look At Different Types Of Capital
Share Capital
This is the money that you (or the Founders of YOUR Business) put into the venture to get it off the ground, so to speak.
In the case of a company you would buy Shares in the company to achieve this end. If you retain profits in your company as it develops these profits supplement the amount originally invested. Losses of course would reduce the Capital amount.
Preference Share Capital
Instead of investing into Ordinary Capital of a business, an investor maybe wants the amount paid in to be secured somewhat. Therefore he purchases Preference Shares. This means that this category of shares is secured by a fixed asset like Land and Buildings, which now cannot be disposed of until the holders of the Preference Shares have been paid out first.
Loan Capital
Instead of buying shares sometimes an investor simply prefers to lend money to a developing business to secure the same ends as Share Capital would. In this case he foregoes the right in participating in the profits of the company by way of Dividends, instead he lends the money taking an interest on the amount invested, or he lends free of interest, with specific terms of repayment, or makes no such terms. The Investor can or prefer not to take some form of security from the company to give a sense of safety to the investment.
Working Capital – The Focus Of This Article
The various way that Working Capital can be raised:
Supplier Credit: Many a time Supplier of the raw materials and/or products that you need to to ‘finish’ your business offering could be prepared to sell to you ‘on account’ – this means that the Supplier will deliver the goods you need but only require you to pay in 30, 60, 90 or 120 days time. . . . . This is a very popular way of raising Working Capital for your business.
Bank Credit: A business can apply to a bank for assistance to help the business on its way. Usually what a bank does is to expend a bank Short, Medium or Long Term Loan to the business, or provide the business with an Overdraft Limit allowing the business to overdraw its bank account up to a specific limit. These facilities are usually secured by Directors Guarantees supported by Fixed Deposits held by the directors personally, or their Stocks and Shares that they own, or other Fixed and moveable assets that a Director/s own.
Factoring or Invoice Discounting: What happens here is that Working Capital is raised from the Sundry Debtors in a company (i.e. from the unpaid invoices a company has issued to its Buyers who will/should pay at a future date. Typically here a bank or finance house buys businesses outstanding invoices, so providing the applicant business with an injection of Working Capital enabling it to continue operations. Not only that the Finance House also undertakes to purchase the future invoices in respect of goods sold and delivered to Buyers.
Invoice Financing: This is a facility that some banks prefer to use instead of buying the invoices from a business, their agreement with the applicant is that they will lend funds to the business’ Debtors by controlling the facility through what we call today Modern Working Capital Techniques. Ideally, while banks now use their existing systems many will swing toward the newly created platform that facilitates the creation of Working Capital as time passes. Details in the Resource Box below.
Reverse Factoring: This facility helps a business pay its Suppliers early. This means that a business can proceed with the knowledge that some or all of its Suppliers can be paid early, and that he does not have to worry about continuation of his sources of supply. Not only that the applicant business does not have to keep administration staff on to answer the perpetual requests for early settlement of outstanding amounts due to Suppliers.
Who today provides these Modern Working Capital Techniques?
Some Divisions of banks and specialist Finance Houses do. However, they tend to specialize in one or two of the services.
A really Creative Financier would work in this way:
He would do a thorough assessment of YOUR business, looking at all aspects of it and help you decide what really are the best Working Capital solutions for you.
It is the appropriate solution that will help your business fly!
The way to find out the answer to this question is by contacting us on +27 83 417 0319 or Email nevillesol@icloud.com
Please feel free to leave a comment regarding this article or any of our previous articles
03 April 2025
How to choose a businessloan: 5 factors to consider
When shopping for abusiness loan, many entrepreneurs make the mistake of focusing solely on the interest rate at the expense of other factors. While the interest rate is important when choosing a business loan, it’s not the whole story. You should be wary of surrendering too much control and flexibility for the sake of a few percentage points on an interest rate. Otherwise, any kind of setback may leave your business, and whatever assets you had to offer as collateral to secure that lower rate, at risk.
Shop around to understand what’s available
Different banks offer different loan products. Key differences are often buried in the fine print. Look for the following information.
-What types of loans do different banks offer?
-What are the loan authorization policies and procedures? Who will authorize your loan?
-Are there specialized account managers for your type of loan or business?
-These individuals can sometimes better appreciate and understand your business.
-Is your account manager willing to negotiate with you? For example, could you get lower fees and more flexibility on repayment terms?
Don’t just take a bank’s word for it. Tap into your network of business contacts. Ask them about their experience with a given bank, the quality of service, any problems they may have had, what was and wasn’t negotiable, and what the bank looked for in a loan proposal.
Before committing to a lender, you should consider the following five factors.
1. Loan term
How long a loan term is the lender willing to offer?
Longer terms mean higher borrowing costs, but that may be an expense you want to incur to ensure you don’t run into cash flow problems.
2. Loan size
What percentage of your project’s cost is your lender willing to finance?
This will determine how big an investment you must make and whether it makes sense to diversify your lending relationship with a second bank.
3. Flexibility
What is the lender’s flexibility on repayments?
As a business person, you know even the best plans can go awry due to unforeseen developments. It’s important to have a frank discussion with your banker about what would happen if you found yourself unable to make scheduled loan repayments. Would your bank let you temporarily suspend principal repayments, for example? It’s important to find out ahead of time, not during a crisis.
4. Collateral
What guarantees are being requested of you in case of default?
If you default on your loan, the bank can go to court to obtain the right to sell the collateral. This is always a last resort, because everyone loses in the process.
Collateralscan include your accounts receivable, pledges and liens (equipment and other fixed assets), inventory, real estate, personal guarantees and third-party guarantees. The type of collateral you offer depends on the nature of your business, the terms and conditions of the bank and the leeway you have to negotiate.
You should know what assets you risk losing in case of a default. This risk may extend beyond your business to include personal assets.
5. Financial reporting and covenants
What reporting and financial obligations is the bank requiring?
Most loan terms have financial reporting obligations requiring that financial statements and reports must be provided to the bank on an annual basis. Smaller loans typically have less demanding reporting requirements.
A covenant is an agreement between the bank and the borrower by which the borrower agrees to a series of conditions in order to get a loan. If a covenant is broken, the terms of the loan are breached and the bank could demand the entire loan be paid back.
For example, as part of a covenant, you might agree not to take out further loans or to maintain a certain financial ratio at a specific level.
Protecting your everyday cash
It’s important to negotiate a loan that fits your needs and those of your company. That’s why you should carefully consider when to borrow, how much to borrow and how fast you want to pay back your loan.
Many of these considerations have to do with protecting your company’s everyday cash—ensuring you can continue to fund the day-to-day operations of your company.
Concluding Comments
Remember what the BIG Secret is here, and that is you need to find and work with a Creative Financier who will assess your present Working Capital usage and point to a better, more economical way of doing things to the benefit of ALL Council or Association Members.
The way to find out the answer to this question is by contacting us on +27 83 417 0319 or Email nevillesol@icloud.com
Please feel free to leave a comment regarding this article or any of our previous articles
28 March 2025
How YOUR Trading Council Or Association Can Benefit Greatly By Using Modern Working Capital Management Techniques
Trading Associations and Councils are formed for the benefit of ALL the members of that Council or Association wherever they are and what role they are playing in their community.
In This Article We Will Examine How Modern Day Working Capital Techniques Can Enhance the business interests of All Members Of Trading Councils and Associations.
We first need to identify the different Groups of businesses that make up an Association or Council.
The importers
The Manufacturers
The Distributors
The Retail Outlets
And the BIG trick – The Creative Financier
What follows is advice as to how these groups can use Modern Day Working Capital Techniques to the advantage their individual business interests.
At the present time each of the four Groups has their own Financier, probably one of the main banks or principal Finance Houses that are usually supported by a Big Brother in the form of a local or international financier of some kind.
Now what can make the Trading Council or Association really successful is to select a common Creative Financier that specializes in commercial financial instruments, and has the ability and flexibility to tailor make, or customize a Modern Working Capital Techniques System for YOUR Council or Association
This Creative Financier can provide the Working Capital for the Importers, Manufacturers and the Distributors. Let’s collectively call these Groups the Suppliers.
The Retail Outlets (Mom and Pop stores, if you like) are the Buyers.
iThere can be one or more selected Creative Financiers – but let’s just focus on one for the moment. We will just call these financiers collectively, for our discussion as the Financier.
Recapping in different words:
The Financier can ensure that ALL buying of raw materials, equipment and stocks of goods needed for sale, on behalf the importers, manufacturers and distributors (the Suppliers) are all purchased at the keenest prices. This concept is similar to that of a co-operative society, but specializing in the trade we want to consider.
So now we can see that ALL supplier’s can be sure that their buying is done at best prices.
The Suppliers, however, will still remain competitive which will depend on the size of their business, overhead structures and profit margins they will seek to work to.
The Suppliers, as members of Trading Council or Group, will also have access to Working Capital in the form of the invoices that they raise to credit worthy buyers can be financed.
The Buyers under the Modern Working Capital Techniques System benefit in the following ways:
They can extend the numbers of days they take to pay the suppliers a little, from say 30 days to 45 or 60 days.
This is not going to make much difference to the Supplier because he is going to be paid quickly as the transactions flow through the system as we will see.
By operating like this the Buyer can plan his Cash Flow better ensuring that the goods he has purchased have been sold BEFORE he has to pay the Supplier.
Let’s look at how the Financier benefits:
In the past he has merely granted a Term Loan or overdraft to the Supplier against some kind of security, a Bond, A Notarial Bond, Pledge of Shares, or Fixed Deposit. On addition to protect himself he would also take a Cession of Debtors in his ‘belt and braces’ approach.
However, now the Financier can get more prudent because he can now choose the actual transactions he wants to finance and expose himself to them in a blink of his eye!
Traditionally the Financier only makes his money in the interest he charges while loans/overdraft are outstanding. However, in this study we will see that the Financier creates other Revenue Steams as he seeks to serve the entire Council or Association.
Understanding how the Modern Working Capital System works for a Council or Association
The fundamental thing to understand is to realize the Working Capital is raised is through a copy of an invoice that flows electronically through the system.
In short the copy invoice flows to a ‘Magic Box’ that contacts the Buyer to ensure that the invoice is genuine.
The Magic Box contacts the Buyer to ensure that the invoice is also due for payment.
The transaction becomes validated/confirmed as the Buyer responds to the Magic Box, who prepares the copy invoice for the Financier to consider financing.
In the graphic below, remembering that some group members can be Buyers – purchasing from the different Suppliers . . . . ..
Then also they can be Suppliers to the Retail Outlets (Buyers).
Therefore one needs to study the graphic through the eyes of the Group they are representing at the time.
In principle we will begin to see that it is the self Modern Working Capital Technique System that serves both Buyers an Sellers.
It is Creative Financier who is customizing the program for the Council or Association involved.
In the graphic below we will remember that the goods involved will flow from Supplier to Buyer under cover of the usual invoice and Proof of Delivery Document.
We are talking about the copy invoice flowing electronically through the system and seeing what actually happens as the Working Capital is raised.
Once the Financier has chosen the invoices he wants to finance, he exposes himself to them crediting the Supplier’s bank account, with the proceeds of that transaction after taking his Finance Fee and his interest charges.
He also keeps a little money back in a Retention Account that he will return to the Supplier once the Buyer has paid the Financier.
Now the same basic system can get used if a Buyer wants to ensure that his Suppliers are paid early:
The easiest way to understand this is to study the graphic below, and understand the comments under it:
In this case what happens is this:
Copies of the Buyer’s outstanding Supplier invoices flow to the Magic Box: The Box then contacts the Supplier effectively to ensure that he wants to be paid early.
On receipt of the confirmation/validation the Box prepares the invoice for the Financier for him to consider financing it/them.
If he is happy the Financier pays the Suppliers early by crediting their bank accounts.
In terms of the arrangements the Financier now waits for the Buyer to pay him 30, 45 or 60 days later whatever they agreed to.
The benefits of the overall system to the parties involved
The commercial interests of the Council or Group have now become ‘in house’ with the benefits of economies of scale being passed on to all Group members!
The Financier is happy too knowing that he is providing a full Financial Service to the Suppliers and Buyers he is assisting commercially!
Suppliers are happier!
Buyers are happier!
Concluding Comments
Remember what the BIG Secret is here, and that is you need to find and work with a Creative Financier who will assess your present Working Capital usage and point to a better, more economical way of doing things to the benefit of ALL Council or Association Members.
The way to find out the answer to this question is by contacting us on +27 83 417 0319 or Email nevillesol@icloud.com
Please feel free to leave a comment regarding this article or any of our previous articles
19 March 2025
In the following articles we will embark on some financial news of a different kind that owners of startups and SMME's might consider and which may be beneficial for them. Let's dive in!!!
Suppliers: ‘Best Practice’ Working Capital Techniques
What we are looking at above are the two major types of Supplier today:
The man who produces crops off his farm or plot for a local BIG Buyer.
The modern supplier of goods who will be using ships, trains, trucks and ‘planes to deliver his goods to creditworthy buyers, because ultimately his desire is to be paid for his production.
Therefore the supplier will seek out creditworthy buyers to sell his produce or goods to hoping that he will be paid according to the arrangements he concludes with the buyer, and not be disappointed in any way whatsoever – even although this can sometimes be a pipe dream!
The accounting forms that will cover the delivery of produce or goods are all the same:
The Invoice
The Proof of Delivery
In decades gone by delivery of goods also included a Bill of Exchange – A ‘Promise To Pay’ to pay for the goods at some future date.
Computerization and digital payment methods have seen Bills of Exchange, cheques (checks) and the like fall into disuse. This fact benefited Financiers and Buyers, but worked to the disadvantage of the Supplier because getting credit from a Buyer became problematical.
Why?
Because the Buyer while still perhaps helping the unsophisticated Supplier to some extent, many a time reneges on the tenets, the payment terms that he undertook to pay the Supplier on, say 30 days.
These delaying tactics are a disaster for both the unsophisticated Seller and the more sophisticated one. These Sellers, after all, have a responsibility to their employees who rely on salaries and wages to keep rent paid, food on the table, clothes for the family and to pay for their children’s education. Late payment of amounts due scupper these national and social well being objectives.
How Suppliers have traditionally raised Working Capital
Supplier Credit
This is the best kind of credit Suppliers can get.
However, it is not always easy to get and sometimes a supplier will withdraw giving credit for a number of reasons.
Bank Credit
This credit is applied for through banks who grant Long and Short Term Loans repayable at fixed monthly intervals.
Or they may provide a Supplier and overdraft. Rarely do unsecured overdrafts get provided today. The banker will always look for security in the form of a creditworthy guarantor, a Bond over Fixed Property or a Notarial General Bond over the business’ moveable assets.
As a matter of course bankers would take Cessions of Outstanding Amounts (Debtors) to cover any liability that may occur in their books. Belt and braces is usually what they require.
If the banker is going to rely on a Cession of Debtors to grant an overdraft, he will invariably be very conservative and grant up to say 20% of an outstanding Debtors Ledger.
Most times this kind of Working Capital credit is simply not enough for a fast growing supplier and his search has to become more imaginative so he seeks out a Finance House who effectively will buy out the Supplier’s outstanding invoices and finance future invoices to creditworthy buyers.
This is a very good way to raise Working Capital. A lot depends on the Finance House that gets chosen for this purposes. Some are better than others. The trick is look for the Finance House who will act as though it is a partner in your business. Few really do this and one has to be careful in their relationship with such a House.
Today, stirring in the Commercial World, is a new option developing that will soon become ‘best business practice’ not only in South Africa but further afield as well.
This system works for the benefit of Suppliers in two ways:
Firstly, it helps suppliers raise money on their production, in the form of financing invoices issued to creditworthy buyers in respect of goods sold and delivered, due for payment on a future date.
The easy way to understand this system is to examine the graphic below realizing that what is happening here is that an ordinary invoice is being validated or confirmed for payment on a future date.
This means that:
The Buyer is indicating to a Seller and a Financier exactly on which day he is going to pay the invoice, AND what account is going to be credited.
I also means that to some extent the Promise To Pay an amount due on a specific future date that existed in the old Bill of Exchange is restored somewhat! – This gives great confidence to Supplier and a potential Financier!
The graphic below helps us understand the procedure a little better – The original invoices still covers the goods delivered from Supplier to Buyer – In the graphic we trace a copy invoice that eventually will raise the Working Capital the Supplier needs:
Easy to follow! – Once the validated invoice pops up on the Financier’s computer screen he makes the decision whether he will finance or not! – In need the trade can be insured!
The Financier then credits the Supplier’s bank account with the Working Capital sought and waits for the Buyer to settle the amount outstanding, on due date, thus closing the open item in the Financier’s books.
Secondly, the Financier can help a Supplier in a slightly different way.
This is very helpful to Supplier who is unsophisticated and needs to be paid more promptly for his produce, e.g. sorghum being sold to a brewer (the Buyer).
Buyers like to keep sources of supply regular and paid early. (Sometimes his inward Cash Flow precludes him from doing this).
So today what can happen is this:
The Buyer selects those Suppliers that he wants to pay early.
The Buyer then can pay the Supplier early in cash.
The cash payments are tallied up and once a week or once a month the Buyer presents a Payment Request (invoice if you like) on the Financier. The Financier then waits for the number of days to pass and then passes a debit to the buyer and crediting the open item in his books to close the transaction.
Graphically this procedure looks like this:
Summing up
What we have been looking at here is ‘best practice’ in Modern Working Capital Management Techniques as it affects a Supplier of produce or goods.
The Hundred Dollar Question is, “Who provides this kind of Financial Service today?”
The way to find out the answer to this question is by contacting us on +27 83 417 0319 or Email nevillesol@icloud.com
