- 19 Mar
How To Finance A Large Order
The feeling when you win a large order, or contract, can be amazing. However, the euphoria can be short lived as large sales often bring with them a number of potential problems, not least of which may be how to finance a large order.
Dedicating Your Resources
The first issue is that your resources may have to be focused on delivering against that large order. This can take your focus away from dealing with smaller customers, and in some cases regular customers that may continue to give you business - even after you have finished delivering against this one off exceptional sale. Don't take your eye off of your regular income earners in favour of a one off opportunity.
It is also sometimes the case that a bulk order requires discounting of the individual unit price, in order to provide a bulk purchasing discount to the customer. In these cases, it could be less lucrative to deliver against one large order than a number of small orders, where you may be able to charge higher margins.
Prime Debtor Risks
There are a number of risks that go hand-in-hand with having one large customer. These can include the risk that the customer pulls their order at some stage during production. This could be a problem if you have geared up to deliver against it. Even if you have a signed contract, it still does not mean that there is no possibility of the customer cancelling the order. It merely means that you may have some recourse to them for financial settlement, in circumstances that they do. However, this may require that you to take the customer to court, prove that they have breached the contract and that you have incurred damages. This could be a lengthy and difficult process.
The next issue is the potential failure of your customer. Although people often see well-known companies as unlikely to fail, there have been a recent spate of high profile cases such as Carillion, Toys “R” Us and Maplin Electronics that have proven that you are never too large to fail. The fact that you have heard of a business accounts for very little. In the event of the customer failing to pay you, you could be looking at a significant loss. There are ways of protecting your business again such a loss. Bad debt protection is a product that may be able to help you mitigate this risk.
Financing A Large Order
Lastly, you can have cash flow problems arising from needing to cover the staff and raw material costs to fulfil the order. Products such as invoice finance can help with these kinds of costs. Delivering against the order can create cash flow problems for your business as you need to dedicate staff time and/or raw materials to producing the product, or delivering the service. This needs to be paid for, and a significant order could give rise to significant additional marginal costs (those that are directly driven by the amount you sell, rather than your standard overheads). Invoice financing services work by releasing a large proportion of the value of your sales invoices as soon as you raise them, so that you do not have to wait for the customer to pay in order to access the cash. This can be very useful when trying to finance a large order by paying suppliers and staff. If you are worried about having to continue with the invoice financing after you have delivered against the order there are selective funding services that place no requirement on you to ever use the service again. You can access these services on a one time basis if you wish - however there may be significant cash flow benefits in continuing with such a funding service.
If you are already a business that uses invoice finance, taking on a single large customer can be a problem for some invoice finance companies. Funders tend to be concerned about the spread of debtors on your sales ledger, and they can restrict your overall funding if you significantly change the spread to focus on one large customer. However, not all providers work in the same way, and there are plenty of invoice finance companies that are prepared to take a more relaxed view to prime debtors, if you take on a large customer order.
To get help with your situation please call Sean on 03330 113622 to talk through your requirements.