Transport businesses feel cashflow pinch, research shows

By: Wayne Smith

Employment regulations and excessive red tape hampering productivity, SME Growth Index indicates

Transport businesses feel cashflow pinch, research shows
Wayne Smith


What’s concerning the owners of transport and logistics businesses across Australia?

The latest results of the Scottish Pacific SME Growth Index give a pretty good indication: the main pain points are around BAS red tape, employment regulations and cashflow issues.

The twice-yearly Scottish Pacific SME Growth Index looks at growth expectations and key concerns of 1200 owners, CEOs or CFOs of Australian SMEs across a range of industries, with annual turnover of $1-20 million.

With almost 10 percent of respondents being owners or senior managers of transport and storage businesses, the poll reflects the thoughts of more than 100 transport company owners around Australia.

SME owners were cautious about revenue growth through to February 2018, with almost a quarter saying revenue would decline, 28 per cent stable or consolidating and less than half (48 per cent) predicting revenue to rise.

Within this uncertain growth environment, SME owners were clear about what was hampering productivity – employment regulations and excessive red tape were the top two issues.

SMEs named the main revenue growth barriers as high or multiple taxes (75 per cent), conditions of credit (69 per cent) and availability of credit (64 per cent).

Cashflow an issue for growing transport businesses

When only growth SMEs were taken into account, one other barrier was prominent - more than 60% of growth SMEs named cash flow as an issue.

Cash flow management is a key concern within the transport sector, which operates on tight margins.

Whether a business has a fleet of vehicles or is a one-truck owner-driver, it’s a real effort maintaining working capital in the face of rising diesel prices, staff wages, fleet maintenance and seasonal fluctuations.

All the while waiting 30 to 60 days, or longer, for customers to pay.

With banks tightening small business lending criteria, those transport businesses which have relied on or are seeking a bank overdraft may feel the pinch.

There are funding options beyond property secured finance which support strong cash flow management and don’t put the family home at risk.

These options, including invoice finance, are becoming increasingly popular, with the SME Growth Index highlighting the closing gap between banks and alternative funding.

Since the Index began tracking sentiment in 2014, the number of SMEs funding growth via their main relationship bank continues to trend downwards (from 38 per cent to 27 per cent) while the popularity of non-banks has grown (from 10 per cent up to 22 per cent).

With an almost 10 per cent jump in the number of growth SMEs citing cash flow as a key barrier to business growth, and the increase in those planning to fund expansion plans via non-bank lending, the time is right for transport businesses to look for fast and effective growth funding options.

Invoice finance is a line of credit linked to and secured by the outstanding accounts receivable, for any business that supplies products or services to other businesses on standard trade credit terms of up to 90 days.

It does not require real estate security, effectively quarantining your business borrowing and protecting your personal assets as your borrowing is secured against business receivables.

Transport sector early adopters of invoice finance

Many operators in the transport & logistics sector already use invoice finance to smooth out seasonal highs and lows and keep money at hand to pay staff and suppliers - for Scottish Pacific, transport & logistics is one of the biggest industry sectors we support.

When many large fleets are offering settlement or early payment discounts of 2 per cent to 5 per cent to stay competitive and get paid quickly, this can cut into already tight margins.

With invoice finance allowing transport businesses to draw down up to 80 percent against the value of what they are owed, as soon as they raise an invoice, this provides an up-front cash injection rather than the typical stressful wait for the invoices to be paid.

It also allows smart operators to give customers longer terms knowing that the business can support the wait for payment – in many cases, this can be the difference between winning and losing new business.

For one Scottish Pacific client, a family business specialising in interstate transport and employing 30 staff, invoice finance means they can keep their trucks on the road.

"When we started almost two decades ago, we self-funded by mortgaging our homes. As the business grew, this funding option became too difficult – and too limiting," the owner says.

"Invoice finance has made a huge difference to us. It is easily scalable because the size of our facility grows in line with the invoices we generate.

"As our business grows, our facility grows with us – we don’t have to be constantly refinancing."

It also means that if a new opportunity comes along the business can say yes quickly, without waiting for bank approval on whether the new opportunity can be funded.

Given tough current market conditions, not all in the transport sector are set on growth.

One Victorian furniture removal business was really feeling the pinch from the flat economy and thin profit margins when his biggest client, a multinational, suddenly extended payment terms from seven days to 60.

His business needed a very quick cash injection to smooth out cash flow, and allow them to meet fuel and wages obligations.

They used selective invoice finance, allowing a business to pick and choose which invoices they want funded without having to commit to a long-term finance facility.

For this small business, using selective invoice finance to fund just one major invoice a week allowed him to negotiate an increase in margin with his largest customer, which he used to partially offset the cost of the facility.

This works well for seasonal businesses or those with only occasional requirements for extra working capital.

We see many transport businesses with pressing cashflow needs because they have won a contract and need to purchase another vehicle quickly, but are already capped out.

They may bundle together three or four invoices into a Selective Invoice Finance arrangement to get the money to provide a deposit for the vehicle.

It’s an easy short-term solution and having tried out this style of funding, many then go on to commit to a full invoice finance facility with peace of mind that they have seen how it works in action and are comfortable to commit to a longer term deal that provides a more complete solution for them.

Many of these businesses are also utilising Bad Debt Protection, which is available to invoice finance clients and guarantees them up to 90 per cent of the balance owed in the event a customer becomes insolvent.

Given the tight margins and conditions in the sector, this provides a level of comfort around taking on new clients.

Certainly an option worth considering for transport and logistics businesses looking to solve some of their sector’s common small business pain points.

Wayne Smith is head of Debtor Finance at Scottish Pacific Group.

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