28.11.2015

Funding and consultancy help complete a Herculean task

Quick fix solutions in business mask symptoms rather than get to the root cause of the problem. Increasing an overdraft limit by £10,000, for example – if it were possible in this climate – may help pay the staff wages this week but it does nothing to change the factors which affect the company’s underlying ability to generate cash. Change the basis on which the business charges out its services, perhaps, or help it to purchase stocks and materials on improved terms, and the effect should be instantaneous. And long term.

A skill which Trade & Export Finance Ltd (TAEFL) has brought to the SME arena is an ability to work with smaller companies to transform the way they operate. But unlike ‘consultants’ who give advice but don’t have the wherewithal to back it up, TAEFL can follow up its recommendations with logistical support and flexible funding, often from the specialist finance companies that it has set up for this kind of application.

TAEFL takes a distinctive approach to problem solving

This idealised approach reads well on paper, but is there any evidence that it works in practice? The TAEFL team would point to CRT Construction as a fine example of its business model.

Twelve months ago, Trade & Export Finance was approached by CRT, which installs ‘dry-lining’ in buildings being re-furbished or newly constructed. This stage in the development cycle is where interior walls are constructed and fitted; a skilled activity which builder/developers contract out to specialists in this field.

To release working capital before the prime contractors settle their invoices, CRT had negotiated an invoice discounting agreement with an independent factoring company which had secured the debt through a first charge over the business.

Extended trading terms within the construction sector had seen mounting pressure on CRT’s cash flow. Credit terms which had been planned into the company’s cash forecasts at a conservative 60 days stretched over time into 90+ days, with the result that all of the payments made by customers were being absorbed in servicing the debt to the finance company. Liquidity was severely constrained and there was no prospect of making the business operate smoothly, let alone make it grow.

Risk that company would be put into a ‘pre-pack’

Matters had become sufficiently serious at the beginning of November 2014 for the finance company to consider liquidation of its client’s business to protect its interests.

The invoice discounter’s preferred route was a ‘pre-pack’ insolvency where a ‘phoenix’ company would take over the company’s contracts and appoint its own management. While the finance company was set to protect its position, the losers would have been CRT’s 80 specialist staff and sub-contractors, along with suppliers who would not have been paid as unsecured creditors.

TAEFL became involved as advisors to the company; negotiating with the invoice discounter while completing an in-depth appraisal of the business. It conceived a reconstruction with an outcome far removed from the proposed pre-pack.

In conjunction with its associate UK EXIM, the TAEFL team developed and funded a solution which has allowed the company to continue operating under its own management. Under the scheme, suppliers have been paid and no jobs lost. As part of the deal, the finance company agreed to give up its first charge over its former client on the firm assurance that it would be repaid out of working capital.

The solution put in place by TAEFL included helping CRT to increase its gross margin on each contract. While there is always stiff competition in building construction, the company was able to rationalise its pricing structure to provide more sustainable gross margins. It has a first class reputation for the work that it does, and its clients know they can rely on CRT for quality and adherence to schedule.

Funding from UK EXIM allowed company to take on new customers

The funding from UK EXIM allowed the CRT management to take on work for additional contractors, thereby reducing its dependency on a small number of large customers. The company’s turnover since TAEFL became involved has increased from £2 million a year to £6 million a year during the course of 2015.

Increasing turnover by a factor of three in the space of one year brings its own problems, which the funding organised by TAEFL has been able to overcome. High growth can put extreme pressure on cash flow. Were this expansion to have been financed through a traditional bank overdraft or loan, the ceiling would inevitably have been reached at a critical time, with CRT forced back to a stop-start operation, but now constrained by a higher level of debt. TAEFL has taken a more responsive view of the business over the past year, making available the correct level of working capital for the needs of its client.

How much of the turnaround has been the result of a new ‘mindset’ being brought to bear on CRT’s issues? The relationship between the directors of CRT and the team at TAEFL is less restrictive than with a factoring company. The cost of finance is also lower than it was with invoice factoring, so there is additional liquidity to fund the continuing growth.

CRT is a clear-cut example of the way that TAEFL analyses a company’s requirements then funds the resulting plan of campaign. TAEFL and its associates have not replaced bank lending: their complementary approach takes business finance to an entirely different plane. It is a view no doubt shared by the 80 families in the CRT ‘orbit’ for whom Christmas 2014 almost did not happen.

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