A business can’t make money without first spending it. Traditionally, that means using saved working capital, a line of credit, a business loan, or investor support to fund operations. Those funds are then invested in the business’ operations, purchasing supplies, paying for labour to create products, and spending to market and sell those products. Then, once the products or services are sold, the business can collect its revenues and earn a profit.
Getting this working capital is, unfortunately, a major limiting factor when it comes to a business’ production capacity, and it’s ability to grow. A company that doesn’t have enough ready funds, for example, might not be able to expand its production capacity to accommodate a major new client. To get around this problem and unlock their full potential, businesses can use off-balance sheet financing like supply chain finance and invoice finance to grow their operations, and even to fund their entire production process.
Getting the funds your business needs to grow with supply chain finance
A long-term growth strategy requires a great deal of investment, usually sourced from investors or a sizable business loan. Those big injections of cash, however, are best suited to large efforts, like building and outfitting new facilities, or expanding into a new international market. However, growth happens every day, with every new client that a business can acquire.
This type of growth requires more limited, but also much more immediate investment to allow the business to purchase additional supplies, and to hire and train new labour resources in the near term. Traditional loans, however, can take several weeks or months to get, making them unsuitable for supporting this type of marginal growth.
When taking on new clients, a great way to get this type of additional financial bandwidth is to use supply chain finance. This type of financing allows businesses to avoid paying suppliers immediately. Instead, the supplier’s financial institution will make payment to the suppliers, and receive payment from the procurer as much as 90 days after the supplier invoice was originally issued. In effect, this increases the business’ payment term to 90 days. As a result, by the time the payment to the financial institution is due, the business’ growing production capacity has had a chance to catch up and begin generating additional revenue.
Fully financing the production process with invoice financing
While supply chain finance is a great way to finance growth, it can also be used to finance all of a business’ production. This is best done in conjunction with invoice financing. Rather than delaying outgoing payments, invoice finance allows businesses to give themselves an advance on future income. They do this by trading an outstanding invoice to their financial institution, who will pay them up-front for most of its value. Then, when the client pays the invoice, they’ll issue the remainder of the funds, minus their fee.
Together, both of these financing tools can be used to eliminate a business’ cash conversion cycle, meaning that it will pay for its inputs only after it has already been paid for the products and services those inputs generated.
How it works
The business uses supply chain finance to fund its supplier purchases. This gives the business 90 days after the supplier issues its invoice to process those supplies, create products, and sell them to its customers. Then, provided that its own invoices to its customers are issued within those 90 days, it can immediately finance them to receive most of their value up front. Those early revenues can then be used to pay for their supplies at the 90 day mark.
The result is a fully financed production process, using none of the business’ own working capital to keep operations running. Best of all, this type of financing is off-balance sheet, meaning that the business can finance itself without using any debt.
The benefit of off-balance sheet financing
Off-balance sheet financing is any type of financing that doesn’t involve taking on any new assets or liabilities. In the case of invoice and supply chain finance, businesses don’t take on any liabilities because they only either convert an existing asset into liquid capital, or extend a payment term on an already existing liability.
By using this type of financing, businesses can keep their balance sheet clean while preserving any existing working capital for other uses. Moreover, it makes them more attractive to investors, and makes it easier to qualify for traditional loans from lenders. This way, they can more reliably access traditional sources of funding when it comes to making more major investments into growth and innovation.