Why every £5m+ business should have long-term working capital finance

long term working capital finance

Why every £5m+ business should have long-term working capital finance

A long-term working capital strategy is a crucial part of a sustainable program of growth, especially for medium-sized businesses. Taking a long-term perspective on working capital makes your focal point the broader strategy, as opposed to tactics. You become concerned with long-term availability and utilisation of working capital, and that is a good thing. Here we discuss why access to long-term working capital finance is the bedrock of a smart financial strategy.

Thinking strategically

A long-term working capital strategy is a fundamental part of success for businesses with a turnover of £5m+. And so demand for long-term working capital finance is often stronger amongst medium-sized enterprises. Those in the process of scaling up invest heavily in things like supply chain optimisation and production capacity increases. All of which need long-term working capital finance.

Due to changes in bank regulations and the rise of financial technology, alternative funding options for businesses have rapidly increased. However, the majority of those options are focused on short-term finance that tactically plugs gaps in cash flow. Long-term working capital solutions are generally restricted to equity and term loans.

Short and long-term working capital finance

Many businesses still utilise short-term finance solutions to cover gaps in working capital, and then use traditional long-term finance methods to help fund their growth.

Short-term finance

Common short-term finance options include:

  • Invoice discounting
  • Factoring
  • Trade finance

These finance solutions are primarily designed for short-term, tactical use. If they are used over the long-term they can be relatively expensive, restrictive, and are often limited in scale. For example, invoice finance requires customer invoices to be raised before funds are released, which limits the amount credited and dictates the timing of the injection of working capital. Furthermore, their relatively high overall costs also make them inefficient over the longer-term, particularly if working capital requirements vary.

Relying on short-term finance to meet working capital requirements is not suitable for many larger businesses. For example, companies that manufacture products that take a long time to build (eg computers, cars, refrigerators) or those with a more complex supply chain are often in need of longer-term finance.

Long-term finance

Larger businesses need to employ a more strategic view of their working capital. They operate at a level above purely tactical working capital ‘firefighting’.

Long-term working capital finance generally takes the shape of:

  • Equity-based capital that relinquishes control and ownership of portions of the business in exchange for a cash investment.
  • Term loans, both secured and unsecured. A pre-agreed amount of money is lent, then paid back (with interest) in regular instalments over the set term.

While these common forms of long-term finance have provided many businesses with the money required to fund long-term expansion and growth, they can be relatively expensive, both in terms of loss of ownership and finance costs. They are also not responsive, flexible or efficient. They are merely methods of raising a large amount of funds.

Long-term loans are designed to fund large, medium-to-long-term projects. Repayments on these loans impacts cash flow consistently over a longer time frame. Furthermore, secured loans can also place a higher level of risk exposure on the borrower business, whose assets used as collateral.

Equity-based capital relies upon external investment, which often requires a business to relinquish a certain level of control, ownership and direction. Moreover, undertaking a sale of shares can be a lengthy process, and also requires the business to pay profit dividends to shareholders, making it usually more costly than finance.

A smarter, agile solution

The above finance solutions have their place in the funding of business growth. They can offer tactical closing of working capital gaps or strategic raising of longer-term working capital, but not usually both. Pay4’s product has been designed to offer both:

  • To provide fast injections of working capital to fund opportunities as they arise.
  • To work as part of a smarter long-term working capital strategy.

Used strategically, Pay4 can help optimise your business operations, improve your supply chain and customer relationships, and maximise profitability. How does Pay4 manage this? We keep things smart, simple and flexible:

  • Ongoing, revolving credit facilities up to £1million
  • Can be used, repaid and reused as often as you require
  • Up to 120 days credit
  • Straightforward transaction fee
  • No non-usage fees
  • Insurance-backed credit which is not secured against business assets

Pay4 can work alongside other forms of finance, and also works at an earlier point in the working capital cycle. This allows businesses to optimise their working capital arrangements for their needs.

The benefits long-term working capital finance that is agile

Increasing liquidity to seize opportunities

Businesses like to maintain a certain amount of strategic working capital at any given moment to ensure that they can capture opportunities as they arise. Having easily accessible working capital at any given moment minimizes the opportunity cost of foregone opportunities.

Incorporating a smart, flexible and fast finance solution such as Pay4’s revolving facility ensures the appropriate working capital is always available. Pay4 is specifically designed to be utilised strategically in this sense. With no non-usage fees, businesses can dip in and out as and when required.

Optimising the supply chain

Pay4 injects working capital earlier in the supply chain without the need for customer invoices to be raised beforehand. This allows it to be used to secure early payment discounts from suppliers without stretching working capital gaps further.

Businesses can also improve their supply chain health by helping their suppliers get much-needed working capital. This also reduces the risk of supply chain failure by extending working capital down multiple tiers of the supply chain.

Smoothing seasonal fluctuations

Seasonal businesses incorporate Pay4 into their working capital strategy to smooth out peaks and troughs in demand. This alleviates the strain on their supply chain and cash flow. Payment for peak demand necessities can be spread over a longer period, helping to ease working capital pressures.

Many businesses hoard cash to cover these peaks. This can hinder the growth of your businesses. Incorporating Pay4 into your long-term working capital strategy frees up this working capital to be used more efficiently throughout the year.

Optimising stock levels

With fluctuations in working capital demand smoothed out, businesses can concentrate on optimising their inventory. Lack of sufficient inventory can prevent a growing business from seizing upon opportunities.

Increased liquidity allows a business to purchase additional stock when needed. 120 days credit ensures the stock will be sold and money received from the client before the Pay4 transaction requires repayment.

Facilitating larger customer contracts

Business are sometimes presented with the chance to tender for a large contract that could have huge long-term benefits. Yet, even with long-term working capital finance in place, such as a bank loan, you can tie up funds, and as a result, the investment required to seize the opportunity is simply not available.

Pay4 provides an injection of working capital at precisely the right point – and without the need to raise customer invoices beforehand. This allows businesses to tender for larger contracts knowing that if successful, they could fund the setup costs and furthermore, exceed customer expectations.

Improving customer terms

With a Pay4 facility you can consider the strategic opportunities that having access to additional working capital provides. One of these is increased customer credit terms.

Allowing key prospects and customers to enjoy increased credit can aid the winning of new, potentially lucrative contracts. Enhancing your competitiveness as a result.

Optimising profitability

By using Pay4 businesses can potentially charge a higher price to end clients for providing extended credit. By the same token you can also secure favourable terms from your suppliers. This can reduce the cost of goods, which in turn improves EBITDA, gross margin and EPS.

Retaining more equity in your business

Lastly, giving up equity in your business will always be more expensive in the long run than borrowing. Debt is a cheaper option because you’re not losing a part of your business. Giving up a share of your business means giving up a portion of its current and future value. With Pay4 you can access the funds you need to grow, without relinquishing a share of your business, forever.

A strategy for success

Companies should not rely only on limited sources for their working capital needs. They need to draw from multiple avenues. With Pay4, you get the best of both worlds. The speed, simplicity and flexibility of short-term finance, with many of the strategic benefits of long-term working capital finance.

Calling upon flexible solutions such as Pay4’s revolving credit facility in times of immediate need is an essential part of an agile and well-prepared working capital strategy. Also, because it’s insurance-backed, Pay4 is specifically designed to work alongside other forms of finance, whether long-term or short-term.

What is the definition of a successful working capital strategy? One that funds growth, optimises business processes and relationships, and allows a business to seize opportunities. With Pay4 as an ongoing, integral part of your working capital strategy, you’ll be primed for long-term success.

Why Every £5m+ Business Should Have Long-Term Working Capital Finance