Recently we looked at the benefits to businesses of going green, and how companies large and small are recognising this. For manufacturers, there is exciting talk of a green revolution – but the levels of investment required to join this growing movement are relatively high.
SME manufacturers looking to go green, make their production lines leaner and more efficient, or just branch into higher value-added lines face significant funding requirements.
Green manufacturing is not like getting people to print out fewer documents and use their own water bottles instead of disposable cups: it is a major step change that requires serious cash and offers big rewards.
Fortunately, smart cash flow finance means you don’t need to go begging for a bank loan – and you needn’t pay through the nose for the cash.
Invest in Production using Invoice Finance
Let us imagine an SME manufacturer in Australia which has identified a way of improving its production line and becoming more efficient. The improvement will cost $500,000 once-off, but it will result in immediate savings of $150,000 a year in energy and supply costs.
This kind of investment makes total sense to the owner: he or she will see their investment repaid in just over three years. After that, they make an extra $150,000 a year. On top of that, they get to enjoy the benefits of their green decision: in terms of publicity, staff retention and recruitment, and of course contributing to a better environment.
Under conventional financing models, however, the financial case might be less clear cut. Yes, the investment still looks attractive, but the owner would have to sign up to a fixed repayment schedule of principal and interest that will drain the business’ available funds every month. He or she may have to become personally liable by putting up property security; the interest on the loan will mean the investment takes longer to pay for itself; and if the economy hits a bad patch, the re-payments will still have to be met.
For many manufacturers, invoice finance makes more sense in this situation. This is because most businesses already have the money to pay for their upgrades. It’s tied up in the unpaid invoices that they have issued to their customers, or otherwise known as the accounts receivables.
In order to access this cash, the SME manufacturer can sign up for flexible invoice discounting with OptiPay.
How Invoice Finance Works
The manufacturer in our example has annual turnover of $12 million. Every month, it produces approximately $1.0m of goods, ships them to its clients and sends out a number of invoices. Some customers pay within a couple of weeks, others at the end of the following month. Many take even longer.
Invoice finance means that the company can access this cash within 24/48 hours of issuing the invoice to the customer. OptiPay advances the cash within hours, with the invoice acting as a form of guarantee. No further security is required, and indeed the capital amount will be automatically paid off when the customer settles. It is not a loan. OptiPay finance is simply advancing you your money upfront for a small discount on the invoice value when your debtor eventually pays. Think of it as an early settlement discount.
With OptiPay’s flexible funding solutions, the company could choose a series of invoices from some of the slower-paying customers. At the right time, it allows up to $900,000 worth of the $1.0 million of outstanding invoices to be received within 48 hours.
Over the following 30 to 60+ days, the clients pay. The remaining $100,000 covers the few thousand dollars, which could be as low as 1% of the invoice value, in discounting fees that has been agreed, and the company then gets a final payment.
In the meantime, new invoices have been generated and others are being paid. To cover other bills, the business can bring forward further payments, always in the knowledge that the fees will be small, the risks negligible and managed, and the capital settled within months, automatically.
Within three and a half years’, the capital will have been recovered, with all fees already paid as part of the business’ cash flow. From then on, the owner will be $150,000 a year richer; the environment will be better off; and we haven’t even had time to tell you about the cash flow advantages!
