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Why drinks brands should use invoice finance as a business pick-me-up

The UK drinks market has been experiencing a boom in recent years, the gin category alone reached record highs in the summer of 2019 with sales, both home and abroad, peaking at £2.2 billion, according to the Wine and Spirit Trade Association (WSTA).

Even the previously static Whisky market has seen an increase in sales of premium blends of 3.1 per cent as consumers develop more discerning tastes and new spirits to try, with Whisky imports from as far afield as Canada and Japan giving the traditional Scottish market a run for its money.

Craft beer is another category which has experienced a surge in recent years, and the number of new limited edition and small batch brands entering the market has doubled since 2010.

This market boom has meant a plethora of start-up businesses and with that comes the need for funding and business support services bespoke to the needs of drinks companies. Start-up costs in the form of equipment are the first focus for entrepreneurs and there are companies which specialise in offering these services. Once established and recipes and ingredients have been perfected and refined, focus very quickly shifts to sales.

Growing a drinks business

However, although securing sales direct to consumer via an online ecommerce platform or face-to-face at consumer events, pop-ups and farmers markets is often the first route for any ambitious business owner, the holy grail is to secure the volume orders from the on and off-trade channels.

And herein lies the challenge – secure a major order from one of the grocery or retail multiples and you can be excused for thinking you’ll be laughing all the way to the pub. More often than not nothing is further from the truth as this is when the true business management skills really come into play.

Retailers and UK grocery chains while they are often looking to differentiate and list new brands they are also structured unfavourably for smaller food and drink producers who need to provide the finished product long before any payment will be received.

This is where fast growth drinks businesses need a secure financial pipeline which will enable them to keep producing and securing more listings while waiting for income from sales.

With supplier payment terms offered by major UK businesses often far in excess of the standard 30-day terms, even then the chances of being paid on time are not guaranteed.

The Government is aware of this late paying practice by larger firms but, although now requiring supplier payment disclosures, has failed to provide regulation which will penalise and prevent this culture.

The Federation of Small Businesses (FSB) calculates that on average 30 per cent of payments to small businesses are late with an estimated 50,000 businesses ceasing to trade every year – purely down to a lack of cash in the bank.

According to government figures compiled from statutory reporting from the UK’s largest companies, food and drink retailers are often the wrong side of 30-day payment terms, which will put pressure on suppliers who need to access monies owed to pay staff and order raw materials to produce more stock to ensure they can fulfil their orders.

Unlocking cash for growth

Once you’re established, have an order book in place and a pipeline for new orders and listings, it’s vital to keep ahead of the cash position. Invoices issued means cash available before you actually receive the payment from the customer.

This process of releasing working capital is done through invoice finance where, as soon as you have issued an invoice you can access up to [85%/90%?] of the total value.

Where payment can take a considerably longer time to be received this is the most efficient and cost-effective way of unlocking cash to enable reinvestment in areas such as purchase of equipment or raw materials or to facilitate growth through new staff hires.

In addition, another element of invoice finance which is often part of the overall service is the outsourcing of credit management function. When you consider the time taken to chase payments together with the cost of salary and the responsibility and associated management time attached to employing staff it is not an insignificant cost to your business.

Businesses which use invoice finance usually see their DSO (days sales outstanding) fall significantly in the first three months of using invoice finance. This is the benefit of being able to access a full-time team of expert credit controllers who also don’t take holidays (well, not all together anyway).

It’s also worth considering using debtor protection insurance via an invoice finance provider – this provides security and peace of mind against your debtors defaulting on payment.

Cash is king in business and failure to focus on your cash position all too often ends in business failure. What you want is cash pouring into your company to enable future growth – so good luck and give it your best shot.

Categories: Blog