Seasonal trading can be a heavy burden for SMEs to bear, with fluctuating sales having a huge impact on the working capital available to grow your business. According to the ASIC, a recent Australian study found that 40 percent of businesses failed due to inadequate cash flow, with seasonal businesses also being affected by this.
A business affected by seasonal trading can be identified by their sales/profits fluctuating in a repeatable pattern through the year. Example industries include those affected by weather, such as ski companies or winter sports businesses, or those tied to a certain time of year, such as Christmas.
Seasonal trade doesn’t affect all businesses in the same way. The quiet period of trade may not be long enough to cause issues with cash flow, however, for some business it can be the difference between making it through to the next season or not.
Here’s an example of how seasonal trade can affect an SME. For the purpose of this exercise we’ll use an ice cream shop, and we’ll call it Frosty’s. Now, Frosty’s is popular. They have a good reputation with their customers. They have lines out the door in summer, it’s hot, business is booming, demand is high. But then winter rolls around, the temperature drops, the lines disappear, demand is low. During this time their turnover is low, their access to working capital is very limited. As their turnover is low they buy less stock, which makes sense. But then they get an order. And it’s a big order. A catering order.
The local school is having an ice cream day, and they need 1500 cones. This is more stock than Frosty’s have, and herein lies the problem. They haven’t been trading at their summer rates for a few months, so they don’t have the working capital to purchase the stock to fill this order. They can’t afford to miss out on this contract. So, what are their options?
- They could go to the bank to get a loan, but because their recent trading history is inconsistent (due to seasonal trade), they could have difficulty getting finance. It is also unlikely that they would get the funds in time following all the paperwork required. Or if they do, they could get a rate which negates any profit they would make from fulfilling their order.
- They could use a credit card. A lot of businesses have one, and carry credit card debt, but this can be an expensive option as the school is paying on a 60-day term. It can also come with a lot of other problems detailed here.
- They have enquired about an early payment option but to get this they have to offer a discount which removes all of their margin of profit.
Their options aren’t great. This is where invoice finance can help. Invoice finance would allow Frosty’s to sell their invoice from the school which is on a 60-day term and get advanced payment on it. Because invoice finance uses the value of outstanding invoices (amongst other factors), their seasonal fluctuations in recent trading wouldn’t be an issue as they are getting an advancement on a current order or invoice.
With an invoice finance service like Timelio, they would be able to fund their invoice and have the cash in their account within 24 hours, with the payment, when due, being paid directly to Timelio, so there are no long term repayments to worry about. Timelio also have no sign up fees, no account fees, and no lock-in contracts, meaning it doesn’t have to cost you a fortune to secure the working capital you need.
So if you’re a seasonal business and you need some help with your working capital, why not consider looking at an invoice finance service like Timelio. Give us a call on 1300 FUND ME, or get in contact with us today.