SME Clinic

Q I own a business in the wholesale trade of food products.

Our suppliers are mainly overseas, from China and the region, while our buyers are local and include major supermarkets and international hotel chains.

Our suppliers have given us credit terms of 30 days and we have given our buyers credit terms of 90 days.

As a result, we are often unable to match our payment and collection. This is notwithstanding the fact that we need to hold at least 60 days' worth of inventories.

Our suppliers recently offered to give us discounts for bulk purchases on cash terms. But, given our cash flow situation, this is not a viable option for us.

I would like to know how we can make use of banking facilities to take advantage of such business opportunities, as well as to possibly bridge the gap between payment and collection.

It is not uncommon for SMEs to face challenges in matching their payment and collection. Typically, we refer to this funding gap as working capital requirements.

In the structure above, you are holding 60 days of inventories, of which 30 days are funded by your suppliers who have given you 30 days' credit terms.

Your customers will pay you only after 90 days, so you have a funding gap of 120 days.

One solution would be to apply for an invoice financing facility. Invoice financing enables an importer or exporter such as yourself to trade on an open account basis to raise short-term pre- or post-shipment financing using commercial invoices and transport documents.

This form of financing can be for domestic or cross-border transactions.

With these documents, banks can provide short-term financing to you and the financing period should match your funding gap of 120 days.

Typically, the tenure of each advance is between 90 days and a maximum period not exceeding 180 days.

It is suggested that you use import invoice financing as the maximum amount advanced for imports is typically 100 per cent and for exports, the maximum should normally not exceed 85 per cent of the invoice.

You would be able to not only bridge the gap between your payment and collection, but also can, as a buyer, pay the supplier on a cash-on-delivery basis, and should be in a better bargaining position for discounts for bulk purchases on cash terms. Here are some alternative solutions:

•Overdraft facility . This is a more flexible form of borrowing, intended to finance day-to-day cash flow requirements. However, the financing cost is typically higher compared to invoice financing.

•Equity loans from shareholders or third-party investors to bridge any shortfall in funds.

•Consider an incentive (for example, discounted prices) for the shortened credit term to your buyer. If your cost of borrowing is 5 per cent a year, you could consider giving a discount of 3 per cent to the buyer to obtain faster payment (that is, cash on delivery), which will ease your cash flow further.

•Work with your suppliers to explore if they can also extend longer credit terms to you or if you are able to purchase on letters of credit, giving them the comfort that they will be paid when the credit terms are up.

•Mr Ian Teo, head of business banking, Standard Chartered (Singapore)

Do you run a business and have a question for an expert? Send your SME-related queries to Yasmine Yahya at yasminey@sph.com.sg

A version of this article appeared in the print edition of The Straits Times on October 05, 2016, with the headline 'SME Clinic'. Print Edition | Subscribe