Export businesses bridge the gap between manufacturers or resource extractors, and the global economy. Unfortunately, trading goods internationally is time consuming, bureaucratically challenging, and of course, expensive. Businesses need to invest significant funds in acquiring goods, repackaging them for export, and getting them where they need to go.
This means keeping a large amount of working capital on hand to manage these purchasing expenses, and being forced to wait until those goods are sold, and customer payments come in, before they can be reinvested again. Not only does this limit the business’ ability to grow, it also slows it down, preventing it from competing against larger exporters. By using supply chain finance, businesses can instead finance their purchases, making them more efficient, and unlocking nearly unlimited growth potential.
Exporters with small amounts of capital risk irregular shipping times
If all its available capital is already invested, an exporter might well lack the funds to purchase the stock it needs for a particular shipment before the associated payment comes in. While exporters typically require up-front payment, allowing them to do this when necessary, it can slow shipping times down significantly.
Assuming funds are available, an exporter filling a standing monthly order can prepare ahead of time by stocking and packaging goods ahead of time, and shipping them out the minute that payment arrives. When this isn’t the case, those goods need to be ordered from suppliers (after payment arrives) before they can be sent on their way, potentially extending shipping times by days or weeks.
Relying on working capital limits growth
Investing your working capital, and then waiting for revenues to come in before reinvesting is an inefficient way to do business. The time between that initial investment, and when revenues are collected is the cash conversion cycle (CCC). The CCC defines the limit of how many times money can be reinvested to produce returns. For most businesses, this limitation is the most significant barrier to growth.
If the CCC is so long that a business can’t afford to serve all of its potential customers, it is missing chances to create profit and to grow. The shorter the CCC is, the more often it can be invested to serve customers, and the more revenue can be generated. If it drops below 0, the business is receiving revenues before it needs to make the payments that generate that revenue. This means that, if the cash conversion cycle can be reduced to 0, the business has the funds to accommodate all of the customers that it can attract.
How supply chain finance unlocks unlimited growth
Supply chain finance is designed to help businesses reduce their CCC, and often to eliminate it entirely, so that businesses can operate more efficiently, and to serve more customers more reliably. It works by allowing businesses to pay suppliers out of a credit fund, the size of which depends on the business and its financial situation. Payments on the resulting balance can then be deferred by up to 90 days. Depending on whether the exporter has extended payment terms with the supplier, they’ll then have at least 90 days to transform that investment into revenue.
As a result, if the business’ current cash conversion cycle is less than 90 days, its new CCC when using supply chain finance is functionally below 0. That means you can then take on orders of any size that your credit fund can accommodate, effectively maximising your growth.
Using supply chain finance to cut supply costs
Supply chain finance is primarily a tool designed to help businesses extend their payment terms, but Fifo Capital’s supply chain finance facility comes with an additional function; it can help your business cut supply costs as well.
If a supplier is forced to deal with some form of cash flow interruption, or needs to find a way to secure early payment to shorten its own CCC, it can request immediate payment in exchange for a discount. The exporter negotiates a fair discount with their supplier, and once agreed, the early payment is issued at the reduced price. The exporter, however, doesn’t actually need to pay out of their own pocket any sooner, because the payment is released from the credit fund.
Exporters recognise that Fifo Capital’s supply chain finance facility is more than just a simple financing tool. Instead, it systematically improves the business’ efficiency, while boosting their growth potential and cutting supply costs. Additionally, it also stabilises their supply chain, while offering an additional financing tool to suppliers. If applied well, it becomes the financial lynchpin of a business’ success.
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