How a new finance facility resolved a brewery’s cash flow problems and provided funding for growth.
The client
Our client was a craft brewery, turning over just over £1m. It had started out supplying mainly pubs and restaurants, but had a growing element of ‘off-trade’ sales into supermarkets and specialist beer retailers.
Although modestly profitable and growing, the business was frequently under cash flow pressure and routinely operated at the limit of its overdraft facility. The company approached us for advice on its cash flow issues.
The problem
The company’s bank, a high street lender, wasn’t willing to increase the company’s overdraft limit and the relationship had become strained. As a result the directors found that they were under constant cash flow pressure, which was getting worse as sales increased.
An overdraft is used to fund working capital (basically the difference between the credit a business gets from suppliers and the credit it gives to customers) and as a business grows its working capital requirement tends to increase. But because the overdraft limit had been agreed when the company’s sales had been significantly lower, it simply wasn’t adequate for the company’s needs.
One possible solution was to increase the overdraft limit, but the company’s bank evidently thought that the company had become a riskier lending proposition and were not willing to consider this.
The result
The business was profitable and growing and it had a good product, so we were confident it had good prospects for obtaining better, more flexible funding elsewhere.
We worked with management to prepare a brief funding prospectus, setting out the key information which lenders will need to make a quick initial assessment. We provided the prospectus to a number of lenders who we felt would be suitable, based on the size and nature of the business, and the company quickly received two offers of finance.
Both offers were based on invoice finance: a credit facility secured against the company’s sales invoices, which expands as the company’s sales grow. One of the lenders offered not only to lend up to 90% of the value of the company’s sales ledger but offered some additional lending beyond this, secured over the brewery’s plant. In total this offer provided a flexible credit facility providing almost double the funding available under the company’s overdraft, and the company accepted this offer, severing its ties with its bank.
The new facility not only resolved the company’s chronic cash flow issues, but the additional working capital enabled it to increase its sales and its profit, providing a far better platform to succeed.
This is a classic example of the how the wrong type of funding can create serious problems for otherwise profitable companies. Although the new borrowing was higher interest, this was more than made up for by the additional sales which it allowed and, in resolving the cash flow issues, the management time it freed up.
