Welcome to the third article in our Build Back Better series. SMEs frequently tussle over the right financing options for their situation. Well-known routes like invoice finance and supply chain finance are the go-to options, but they’re not suitable for paying suppliers. Chris Williams, director of Seneca Partners, explains why the often overlooked stock finance could be ideal. 

The first two articles in the series are on the use of debt and/or equity when looking to grow your business and whether you should bring external investors into the family business. 

The advantage of paying upfront

Stock finance for SMEs is an area of alternative finance that is often overlooked by both businesses and their professional advisors or brokers. This may be because it is not well understood, because people do not think they will meet the criteria, or simply because it has historically been a niche product whose existence is not widely known.

Business owners and those who assist them – brokers, accountants, etc. – will more often be aware of working capital facilities such as invoice finance, supply chain finance and business loans, and assume they can be used to pay suppliers. They can, but it is usually the case that these more mainstream facilities are not the best option if the key requirement is to pay suppliers for stock. A direct supplier payments stock finance facility is designed exclusively to enable SMEs to pay their suppliers in full for stock prior to shipment.

The pandemic has seen a variety of products in short supply. These pressures look likely to continue and have resulted, predictably, in price increases. This means businesses who can pay their suppliers upfront have an obvious negotiating advantage. In fact, the ability to pay in advance can be the difference between obtaining much needed stock and losing out to a competitor.

Among the most sought-after items have been medical equipment, such as that sold by Aseptika Ltd. Aseptika designs, manufactures and supplies medical devices to UK healthcare providers and recently became an approved supplier to the NHS.

When the NHS issued a £5m contract for blood pressure monitors, with 10 per cent of the order going to Aseptika, the company knew they would need additional working capital and approached us, as a stock finance specialist, seeking a facility to pay their supplier pre-shipment. Timescales were short, a direct supplier payments facility was set up within a week, and the entire transaction was completed in seven weeks.

Aseptika’s MD, Kevin Auton PhD, said “The stock finance facility was set up very quickly and the result was a small UK company could support the NHS in its time of critical need by delivering a plane full of blood pressure monitors from start to finish in just seven weeks. An outstanding achievement for all involved. We look forward to the continued growth of our business and being a trusted NHS supplier who can deliver on promises made, will be a key factor in that growth.”

When stock is in short supply, a reliable stock finance facility allows SMEs to go out and win orders and be confident that they can afford to fulfil them.

Many stock finance facilities work on an on-request basis, so that once the facility is set up, a client can decide at short notice which purchases to use it for and arrange for suppliers in the UK or overseas to be paid the same day, in Sterling or other currencies. There is no need for the stock to be pre-sold or consist of finished items. The stock can also be used in the normal way; stock finance providers do not seek to take physical possession of the stock or restrict the use of the stock in any way during in the normal course of trading.

What are the pros and cons of stock finance?

The advantages of a stock finance facility – flexibility, quick payments to suppliers, buying in larger quantities and the ability to fund growth and large orders – are clear, but these benefits do come at a cost.

The facilities are easy for clients to operate but can be administratively intensive for the lender, so typical rates for funds in use are around 3 per cent per 30 days. Facilities turn quickly, meaning suppliers are paid, goods are shipped and then sold, customer payments received and the facility repaid, in an average of around 60 days. A fully funded £100,000 stock purchase costs £6,000 over 60 days, so the sale of the stock being financed must have sufficient margin and profit opportunity to justify the finance costs; if they do then there is still worthwhile profit to be made. If the transaction can be completed more quickly, then stock finance costs will be reduced.  We calculate charges daily, so every day saved makes a difference in terms of keeping the stock finance costs down. Part payments are also accepted, meaning that as stock is sold on to customers, the sales proceeds can be used to decrease the outstanding stock finance balance as quickly as possible.

Stock finance facilities are naturally revolving, which means repayment creates easily visible headroom to fund the next purchase and so on. Business loans, by contrast, often provide a single uplift in available cash before becoming lost in general cash flow.

Stock finance facilities provide SMEs with reliable purchasing power to obtain stock in times of scarcity and to drive better buying prices when supply is more plentiful; it should be considered by any UK SME planning for growth as we exit the pandemic.

Chris Williams is the director of Seneca Trade Partners.

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