The perfect storm for working capital?
Demand spikes and credit tightens
Whilst Covid-19 has hit many sectors of the economy extremely hard, some sectors have weathered or even grown during the crisis and associated quarantines. Q1 sales have been strong in the IT, Healthcare, Paper & Packaging and, perhaps unsurprisingly the alcoholic beverage sectors which have all remained open for business. Far from suffering, these sectors have, in fact, seen a spike in demand as a result of the virus and associated quarantines and homeworking.
Even when they have been able to steer the physical challenges of the crisis, many players in these markets have been unable to take full advantage of this surge in demand due to disruptions in the availability of working capital. Access to sufficient credit to finance inventory and receivables is critical for wholesalers and retailers to continue and, more importantly, grow trading volumes. A reduction in credit, as many of these players are currently experiencing, actively constrains business and can threaten long term viability.
The reduced headroom on credit limits available to sales channels is coming from two sides at once. On the one hand, utilisation of existing limits made available by vendors and banks has increased as sales have concentrated due to surging demand for some products as well as supply and logistics bottlenecks. At the same time, credit has become scarcer and more expensive. Banks, investors and credit insurers are flooded with demand for credit, but cautious due to the less predictable economic outlook and often face internal challenges themselves that are not consistent with quick decision making. Banks are also being forced to allocate ever scarcer liquidity amongst greater demand. The combined effect of the increased utilisation of existing limits and the reduced availability of alternative sources of working capital is constraining sales and applying increasing pressure to distribution channels.
One solution to the lack of liquidity in the conventional working capital space is Sales Finance. Sales Finance allows vendors to provide support to trading partners by extending the credit periods between the two. Vendors’ invoices are settled 100% when due or even early, freeing up vendors’ credit limits for their buyers, while buyers pay later, enabling them to finance inventory and receivables from their customers. Importantly, Sales Finance is not factoring or Supply Chain Finance – documentation and implementation is simple and fast. Vendors therefore benefit from sales finance by offering extended payment terms to their key buyers on a fully non-recourse basis whilst being paid early themselves. Credit limits are quickly freed up allowing greater sales and DSO related metrics improved. Extended credit terms and increased credit limits in turn allow buyers to increase purchases from the vendors thereby upping turnover significantly.
Sales Finance manages peak credit demands, allowing vendors and partners to continue trading even when the partners’ core credit facilities are fully utilised. The cost of Sales Finance is often covered by existing cash discounts from the vendor, such as early or prompt settlement discounts. This can mean that there is no incremental cost for the vendor, while the partner is able to defer payment until a later date, often while still maintaining existing profit margins.
The Levantor Capital sales finance program is extremely light touch with minimal documentation and the option of digital signatures. The program is driven by a proprietary technology platform which ensures efficiency and accuracy. Financing is sourced from a large panel of bank and non-bank funders meaning that pricing is always as competitive as possible. The multi-bank platform also ensures the greatest possible stability in the offering as events that might adversely impact any one particular funder can be mitigated by increasing funding from a different source. There are no fees or minimum utilisation levels so it provides genuine incremental credit to cover peak sales periods.