A Note From The Founder: How Food Businesses Can Thrive Without Finance
Why i am passionate about the food industry
I come from a family business that was involved in the food production business (Royal Nut Company). We supplied major Australian supermarkets, food manufacturers, restaurants, cafes and we were direct to public as well.
At age 8 I was packing boxes with various nuts (pistachios were my favourite), at 11 I was driving a forklift and at 12 I was roasting macadamias.
In this article I’ll cover practical steps you can take to stay cashflow positive without the need for you to get finance.
On a side note, I help business doing up to $100m in revenue and have worked with 100s of businesses. So I am unashamedly confident that the below advice, with or without our finance solutions will help you succeed.
Why the food sector is so sensitive to cashflow issues
Food production and hospitality businesses are extremely unique. Firstly, because they must quickly turn around products before ingredients and the final product reach their shelf life. Secondly, the end consumer experience must be one of freshness and must appeal to the individual tastes of each consumer. Thirdly, the nature of these businesses means they must incur large upfront costs before being paid, which dramatically strains cashflow.
To make matters worse, when you finally do find an opportunity to grow, you don’t have the surplus capital to cover CAPEX and OPEX. Even if the bank says yes, it’s based on very stringent conditions.
Practical steps you can take to avoid using finance.
5,000 years ago people would barter for goods and services. The truth is you can do the same to help you avoid using finance. You can negotiate terms with your suppliers and customers, that allows you to get business friendly terms, that won't require you to pay money to a lender!
Incentive customers to pay you upfront
Negotiate partial payments upfront or offer discounts to customers if full funds are paid on delivery. The discounts you offer will be cheaper than you using invoice financing or some other type of cashflow finance, which is usually priced at 15% p.a.
Offer suppliers a bonus to pay later
Sounds crazy right? But offering your suppliers 1% or 2% more if they can give you 30 or 60 days to pay, is cheaper than getting finance from me. Would you rather pay 8% to 20% p.a. for bank funding or private lending?
Buy in bulk, pay partially in advance but don’t store it at yours
One of the things my father would do is he would buy 6 months of a particular ingredient from a supplier in advance at a discount for the large bulk order. He would then pay them a deposit on the whole 6 months supply (to give the supplier certainty). He would then get delivery on a monthly basis and provide the full payment for that portion on delivery. This allowed him to save 5% on the total order instead of paying for it monthly. Additionally, he saved the cost of not having to store 6 months of goods in the warehouse (space, utilities and air conditioning).
Get government grants!
If you’re creating unique products, then you may be eligible for research and development grants that get you 43.5 cents in the dollar. Are you exporting? You may be eligible for the export market development grant. Are you setting up a new plant? You may be eligible for a $1M government co contribution grant for new plant and equipment. You can read more about structuring for grants here.
Learn how to hedge
One of the things my father did, was he was be able to work out through his IP whether the price of certain goods would go up in the year coming (20% of it was a punt as well). He would then put in a large bulk order (in containers) with importers and pay a deposit a year in advance at a locked in price. When the following year came, the price of that good would be higher, but he had locked in the lower price from the importer. Importers would have to honour that price or buy that stock back from him at a higher price than what they sold it for.
Review your business model
Are the things you’re selling making you money after all direct and indirect costs are paid or are they losing you money? Focus on what your highest profit margin products are.
Visibility helps you sleep at night
Forecast your cashflows (inflows and outflows) for the next 12 months, and update your projections weekly. Then reconcile your budget with actuals to know where your upcoming financial gaps are.
Have a war chest
Putting aside a little extra when times are good can cover you when things go quiet or unexpected emergencies arise. Usually, you want at least 5% to 10% of your yearly business revenues held in a war chest. Doing this will save you from needing to take a second mortgage from me when a crisis happens.
Did any of the above ponder your curiosity? Contact me and I’ll guide you through any dot points you may want help on.
What Finance Options Do You Have Besides Banks
Funding for food manufacturing and hospitality businesses can be especially hard. Most of the time the banks will want to take your property as security and apply stringent conditions.
So, what options do you have?
Firstly You need to layer your debt correctly
Most businesses do not layer their financial debts properly. This means the bank often takes more security than what they are entitled to, whilst reducing how much money they give you. If debt is layered correctly, you can maximise borrowing, and have multiple lenders serve you.
Private corporate debt
A growing emergence of private corporate debt providers are providing credit when the banks won’t. Whilst pricing is 2% or 3% higher than a bank. This works best for businesses doing above $1M EBITDA.
Get the right equipment finance solutions
Equipment to food businesses is critical for their success and having a funding partner that can work with you is a must! Pricing is not the only component to consider, how the loan is repaid (interest only vs P&I), the length of the loan and how much they are willing to lend you are also important factors. RSC works with specialist equipment finance brokers that understand food businesses. Speak to us to to get you our business partners to work with you.
Invoice finance / Invoice financing
With invoice financing you can use your invoices as security and have up to 90% of the invoice amount advanced to you. This helps you get money ASAP, and allows you to pay wages, suppliers and other expenses without being at the mercy of your clients.
2nd mortgage / second mortgages
Need funds for only a year or less, but the bank won’t give you more? You may wish to consider a second mortgage loan. Whilst 2nd mortgages aren’t cheap, they often make sense where your return on borrowed capital is greater than the cost, or the inconvenience solved is greater than the cost.
Private loans / private lending
Private lending can open various doors for you without the restrictions of the bank. Things like capitalised interest (not having to service the loan), having tax debts and funding even with bad credit scores help to separate private lending from conventional bank funding. Additionally, loans against alternative assets such as heritage plates helps open up new doors of funding that banks won’t touch.
To speak to me directly, contact us here.
To read more about invoice finance click here
To read more about private corporate debt click here.
To read more about private lenders in Brisbane click here.
To read more about private lenders in Sydney click here.
