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.
Should you require any further information on sales finance or on Levantor
Capital, feel free to reach out to David Frye at david.frye@levantor.com.