Smart Business Solutions - Finance

How a Small Business can Finance a Big Deal

When a small exporter lands a big order, lack of cash flow is often the single biggest obstacle to fulfilling it. What to do to stay afloat

Written by Lori Williams

When Syed Ali first started exporting halal meats from Canada to the Middle East three years ago, most of his transactions were small enough that Ali was able to cover the costs—such as paying his suppliers for the goods and shipping them overseas—himself. But after Saudi Arabia banned U.S. beef in May 2012, Ali’s company was flooded with new business. In the same year, Ali received about $1 million worth of orders; this year, that number skyrocketed to around $10 million.

“The clients were used to getting the taste of North American beef, and Canada was the only option left,” says the 41-year-old Markham resident and owner of Riz Global Foods. “We started getting huge orders but we were unable to fulfil them because of the cash flow situation.”

The main reason why small to mid-sized companies fail is not lack of sales but lack of cash flow.

Generating cash flow can be challenging for small to mid-sized export businesses like Riz Global Foods. Ali has to pay his supplier in Canada before he can ship the goods overseas, but his client doesn’t pay him until 45 days after shipping. “I needed to bridge the gap,” says Ali.

The longer cash flow cycle is a significant problem for a small company that lands a big order but doesn’t have the money to pay for the goods up front. Moreover, big banks consider new businesses high risk and won’t provide them with financing.

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“You’d hate to see someone work hard, develop their business, have this huge sales opportunity and then have to turn it down because they don’t have the working capital,” says Anne MacRae, vice-president of business development at Trade Finance Solutions. “That’s where we come in.”

The Canadian financial firm provides anywhere from $200,000 to $6 million to help an exporter pay for goods that are for confirmed sale. Although Trade Finance Solutions doesn’t fund only export companies, MacRae says that more than 80% of the financing the company provided last year had a cross-border component. And as the economy continues to become more global in nature, more companies are likely to face cash flow challenges. According to MacRae, “The main reason why small to mid-sized companies fail is not lack of sales but lack of cash flow.”

Trade Finance Solutions helps companies like Ali’s, which don’t qualify for bank loans for one reason or another, close the gap by providing purchase order financing or buying their accounts receivables. While banks only consider the track record of the company that’s requesting funding, firms like Trade Finance Solutions look at the strength of the customers. Ali hasn’t been in business long enough to secure funding from a bank, but he has good customers, says MacRae.

“Even though they’re foreign buyers, they’re very large, reputable, well financed companies that pay their bills. That’s what’s most important to us, not how long he’s been in business for.”

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Of course, loans from a company like Trade Finance Solutions are more expensive than traditional bank financing. Although fees vary on a case-by-case basis, MacRae says a 30-day transaction typically carries a 3% charge. Meanwhile, similar financing from a bank is likely to cost around 3% to 5% per year, says Ali.

Ali recently received pre-approval for a line of credit from his bank. He expects to switch to bank financing in about six months’ time, once his financial statements for 2013 are ready.

That’s par for the course for Trade Finance Solutions, whose goal is to help companies like Ali’s grow big enough that they can finance their transactions, or secure cheaper loans from a bank, says MacRae. “I would question if a client stays with us too long, because it means they’re probably not making enough margin,” MacRae says. “Eventually they should outgrow us.”

Read: 8 Simple Ways to Increase Your Cash Flow

Read: Dollars and Sense

Originally appeared on PROFITguide.com