Business growth requires a solid foundation which is built on a solid, well thought out risk management system. When you minimise your risks, you reduce exposure to losses and maximise profits.The single most important thing an SME can do to minimise risk is to establish a risk management plan that identifies risks & nominates processes to deal with them.
The list of business risks can be extensive but can be categorised as:
- Regulatory Risk
- Market Risk
- Environmental Risk
- Credit Risk.
As a specialist in Credit Facilitation to the Drilling sector, Finlease (ADIA member) can assist members in minimising credit risk in the following areas:
- Equipment Risk
- Negative Cash Flow
- Businesses should consider arranging lines of credit with a number of lenders for future equipment purchases of new & used equipment, vehicles etc.
- This offers you peace of mind with a ready to go facility when you decide it is the right time to buy additional equipment for growth or replacing older machinery that may be costing you in large repair bills.
- Imagine finding bargain buys at Auction, but you miss out on the opportunity to buy by not having your funding ready. You can improve your position by planning ahead & thinking about your business proactively.
- Having a good spread of lenders is the key. You do not want your bank being the only player to run your funding decisions. It is smart to keep all or if possible, most of your equipment funding away from your core bank. Spread the risk. Do not put all your eggs in one basket.
- The amount you can borrow can be improved by placing your funding purchases with a variety of lenders, giving them a slice of your business & not all business to one bank.
- Why do this? Because you control the risk. You can leverage off the various lenders who all wish to compete for your business.
- There is great opportunity to access valuable equity in equipment you currently own or where you are at the tail end of a finance contract. Valuations on this equipment by independent valuers will identify your equity which you can use to borrow against. This is called equity raising or working capital raising. Such funds raised can be used as deposits on additional equipment or paying creditors & any other worthwhile cash flow purpose.
Negative Cash Flow:
- Getting paid on time does not often happen easily. Recent trade payment analysis by Dunn & Bradstreet shows that just 38% of business invoices are paid on time. This impacts on your business by:
- Impeding cash flow
- Locking up your capital
- Incurring additional administration costs
- Diminishing investment potential
- Hampering market competitiveness
- Reducing confidence with your suppliers & creditors
- For every $10M of annual turnover, a 3 day drift in an invoice due can take a $115K bite out of working capital ($10M/261 working days p/a). For many businesses, this means resorting to increased borrowings, going cap in hand to the bank to bridge the gap.
- Usually, the larger the company you deal with (debtor), the slower you get paid. This could cripple your business.
- SOLUTION: Invoice Discounting enables you to take full control of your collections & gives you an immediate cash injection of 80% against your outstanding invoices. Once your client pays you for the invoice in full, your financier will give you the remaining balance 20%, less a small fee.
- Be aware of the trappings of Early Settlement Discounts offered by your clients. For example, a 5% settlement discount for early settlement on $10M turnover equates to $500K in forgone revenue. An invoice discounting facility will minimise that risk to you.
- Progress Payment Invoice Discounting is also available to you, if you trade with your clients on progress payment terms.
Using a good finance broker will help you minimise credit risk and are independent of any lender & work for you, the client.
– Mark O’Donoghue, CEO & Founder of Finlease.