What’s the cost and impact of mismatched working capital products to trading cycles?

The Iceberg Effect happens when what you see above the surface in your business doesn’t match up with what you can’t control beneath the surface.

In other words, your ratio of what you can’t control vs. what you can control is too big.

It’s especially prominent when working capital isn’t matched to supply chain cycles.

Borrowing funds that don’t match the purpose can have unseen effects ahead of the journey that can’t be accounted for or worse, prevent you from seizing new profitable opportunities as they happen.

What do we mean by that?

Financing incremental or substantial seasonal sales growth means cash reserves get diverted to take advantage to meet supplier and production demands. If you don’t have these funds, you immediately seek to raise working capital from external sources.

You need to raise capital that serves the new sales growth explicitly without impacting the existing day-to-day operation.

The fixed-term loan impact

Funding that requires repayments upon drawdown on a fixed term over a period that outpaces the sale and customer payments of inventory defeat the purpose of why you need the funding in the first place.

When funds are used to pay suppliers and those funds aren’t converted back into the business for up to 180 days (6 months) it can place enormous stress on a company.

Add in fixed repayments on funding that won’t have a conversion of capital for up to 6 months; repayments immediately starve operational cash reserves from:

Wage payments

ATO (Tax obligations)

Marketing

Other finance commitments

Rent Etc

This capital starvation can leave your company depleted and vulnerable during the immediate sales growth.

Sure, you’ve been able to get the supplier paid, but, the stress on the operation until final payment comes in from sales is yet to be felt, especially if another profitable opportunity comes along and you’re forced to decline the transaction.

Term loan providers will either ask for mortgage security or demand very high rates with regular repayments.

The major issue with most fixed term loan options is their inability to match the funding to your supply chain.

Need help funding sales with capital matched to your supply chain? Ask Stak.

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We regularly share our thoughts on trade finance, lending, procurement, logistics, and international trading.

Stak provides working capital to clients that sell to some of the largest buyers in Australia & overseas.