Cashflow is King – trading through holiday periods
Updated: Jul 22, 2020
Typically, the Christmas & Easter periods are a difficult time for many businesses as most industries shut down during these holiday seasons, thus having a significant impact on business cashflow. This can often put the “last nail in the coffin” of a business suffering financial difficulty of some sort. This month’s case study looks at a client who suffered cashflow issues which were brought to the surface by actions from their bankers during this difficult trading period.
Our client operated a manufacturing business employing some 18 staff. The business had suffered over the previous years due to loss of contracts brought about by the GFC but had turned the corner and was rebuilding. In the previous December, the director had approached his bank (as he had done in previous years) for a temporary increase in the overdraft limit to assist with predicted cashflow shortfalls over the Christmas period.
Much to the surprise of the director, instead of a friendly approval on the usual increase the bank denied his request, transferred his file to Impaired Asset Management, cancelled his trade finance facilities and applied pressure for the business to exit. The bank did this even though there was no monetary default. The director had no choice but to then negotiate a Deed of Forbearance with the bank for a period of time to allow a refinance of the facility.
The bank’s actions placed insurmountable pressure on the business with an already stretched cashflow which resulted in the swift accumulation of additional debts, particularly to the Australian Taxation Office (“ATO”). By the time the director’s accountant referred him to de Jonge Read, the creditors had increased to $660,000 with the company in arrears with the ATO who were threatening to commence legal action.
When the director was introduced to de Jonge Read, the snapshot was as follows –
Debtors $900,000 – Collectable Overdraft $250,000 – Secured by director’s personal property Creditors $260,000 – Currently within trading terms ATO $400,000 – Overdue with legal action pending
While the business was viable, the company’s financial position had been impacted by the previous loss of contracts. The history of financial performance and the ATO debt made refinancing by a traditional bank lender unachievable and pressure was being placed on the business as the Deed of Forbearance had expired. The director had been trying to have a bank take out the facility to no avail and was stressed and did not know what to do.
de Jonge Read investigated the options available and recommended Debtor Finance as a suitable option for the client. de Jonge Read then went about identifying a suitable product and assisting in gaining the approval of same. This finance was then coupled with a repayment plan negotiation with the ATO that we undertook and successfully arranged to be put into place.
This strategy allowed for –
Funds to be raised from the debtors' ledger, sufficient to repay the bank and release the director’s personal property from the business' exposure and address the items below. Funds released were at 80% advance giving the company some $700,000 in cash. After repaying the overdraft of $250,000, $450,000 remained available;
A lump sum payment to the ATO of $250,000 with the balance of the ATO debt being placed on an affordable payment plan over some 18 months;
Business cashflow of some $200,000;
Trade creditors continuing to be paid within trading terms;
A more flexible funding facility that fluctuates with the sales’ pattern, giving the business funds when necessary. As sales increase the funding line can grow, providing a source of funding for business growth.
The business was able to continue in the industry while providing continued employment to a number of staff. Today, the business has grown significantly and continues to utilise debtor finance which has funded its growth. Further, the family home was released as security for business borrowings. This was particularly important for the director’s wife and provided significant peace of mind.
While the director had some concerns about how his clients may perceive his use of this nature of facility, not a single client was lost. These client relationships had been built on performance, quality and value for money – not the type of finance the business used.
Debtor finance, also known as invoice finance or factoring, is often a very viable alternative where a business requires assistance with its cashflow but may not have property or physical assets available to secure an overdraft facility or have the trading history that is palatable to a traditional lender.
In the lead up to, and during, these inactive trading periods, advisors should be mindful that some of their clients may be suffering increased financial difficulty. de Jonge Read specialise in helping clients through these difficulties by identifying the best options possible.