Short-term cash-flow options

IDEALLY, a business overdraft meets cash flow needs year-round, but in the farming game things are rarely ideal.
Short-term cash-flow options Short-term cash-flow options Short-term cash-flow options Short-term cash-flow options Short-term cash-flow options

Managing cash flow.

Chris Warrick

The typical solution for a short-term cash flow issue is to simply extend the overdraft for a few months. However if this option is not available, there are alternatives.

Regardless of the funding option chosen, all require some time to prepare and setup, some more than others. Therefore, the earlier the planning is done, the more options are available.

The cost of not planning or ‘trying to get through' can be significant if critical operations have to be delayed or missed, for example fertiliser or chemical applications or critical animal health operations. When cash-flow restrictions dictate production or marketing decisions, it has a negatively compounding effect on business profit, which exponentially worsens.

The most common and simplest solution is to extend the overdraft with a temporary limit increase for the few months when cash flow will be tight. Costs to be aware of and to ask the lender about include if there will be additional line fees, setup fees or premium interest rates.

It's also wise to plan ahead to know how long it might take to setup the temporary limit increase so the lender has enough notice whether it's a few days, weeks or a month. The lender will also need a budget to know how long the limit increase will be required for.

A potentially limiting factor will be how much security the lender has for the existing overdraft facility. If the security is already fully leveraged at current market value, then a limit increase may not be possible or would fall in the category of unsecured borrowings.

Another potentially unattractive issue is for some lenders is they have to set up a new account and transfer the existing overdraft to a new, larger one to increase an overdraft limit. This can be more trouble than it's worth and should prompt investigation of other options.

For many people, a commonly overlooked option is to simply redraw on an existing variable loan. It's worth checking with the lender if past principle repayments of loans allows them to be redrawn for a short period or if the loan limit has decreased with each repayment.

Providing a reliable repayment history has been demonstrated and the security for the loan hasn't decreased, there's no reason why a redraw facility shouldn't be able to be setup.

Redrawing existing loans if already setup with flexibility in the first place is the quickest source of cash-flow during tight times and will generally be at the best interest rate.

Experience shows that issues arise when existing loans are redrawn for short term cash flow but then not repaid after harvest. The strategy needs to remain or be strategically reviewed if a repayment can't be made after harvest but never ignored or forgotten about.

Failing to plan the repayment means the cash-flow option won't be there to use next year and the lender may end up in an even tighter predicament.

The obvious option after overdraft is using store credit which means input costs are left on account at the store they were purchased from either for a few months or until after harvest. Obviously the ‘after harvest' type arrangements need to be arranged, contracted and formally agreed. The shorter term store credit can however, often be agreed verbally or certainly less formally.

If using store credit to free up overdraft, plan ahead and start purchasing on the store credit well in advance of the overdraft reaching its limit. This allows the overdraft ‘room' for the expenses that can't be put on the store credit.

Successful use of store credit boils down to open communication and prior agreement of interest or fees and length of term so both parties are aware of the arrangement and there are no surprises.

This is far better for both businesses in maintaining a healthy trading relationship than potentially being put in the category of ‘bad payer' by the store and have them increase the purchase prices to cover their concern about getting paid.

If part of the overdraft squeeze is due to livestock purchases, there are stock loans available from most agents. Terms vary from a month to several months before interest is charged with loans typically up to 12 months.

This can be a simple and very cost effective way to leave room on the overdraft by using a different source of finance for livestock purchases. The other advantage is the asset value of the livestock is leveraged for the loan rather than tying up land assets for security.

Stock loans work particularly well for trade stock but are obviously no help if livestock purchases are not part of the overdraft burden.

With credit cards, most people think about domestic, consumer type cards that get people with low self-control into trouble. Nowadays there are business credit cards available which can be setup with substantial limits. Not always the most cost effective form of finance, almost always having higher interest rates, credit cards can be an option if no others are available.

From time to time there are promotional deals of extended interest free terms for balance transfers, just be cautious about the terms and conditions of these deals as they often still require frequent principle repayments during that interest-free period.

The other limitations of credit cards are that if cash or direct debit funds transfers are what's needed, interest will be charged from the day cash is drawn out or funds are transferred and often at a penalty interest rate for the cash advance.

When cash-flow is tight, the opportunity cost of not selling livestock, grain, wool or hay becomes vivid, for example stock that has been produced for sale but is being held until a higher price can be achieved.

The equation changes when cash-flow is tight from trying to pick the best time to sell in the market place to focusing on the likely upside of missing out on by selling now versus the cost of not selling.

In the event stock is sold to free up cash-flow, don't be scared to negotiate shorter payment terms. Rather than straight line bargaining on the sale price, there may be an option to lower the price in return for shorter payment terms.

Selling stock based primarily on cash-flow pressure rather than as part of a marketing strategy is not good business and should not become a regular habit, rather a last resort option. If this option has to be used, it's a tangible reminder that we need to improve our budgeting and planning.

For more details contact Chris Warrick, Primary Business, chris@primarybusiness.com.au or 0427 247 476.