Smaller businesses always struggle more with getting payment, especially when exporting to customers overseas. Traditional reverse factoring supply chain finance models only really make a substantial dent in the finance gap if a significant proportion of sales revenue comes from suppliers offering SCF.
But what if the customer base is too fragmented? Or the immediate customers are, in fact, distributors which are, themselves, unable to provide financial assistance to their suppliers?
Ecospin, a small British business that manufactures electric, three-wheeled vehicles for security services, recently found the answer: a supplier finance tool provided by URICA.
Paul Loomes, a car designer who specialised in making clay models for some of the world’s most prestigious brands, started to get the idea for the new vehicle about nine years ago. “I was a big fan of the Segway,” he says. “But although it’s a fantastic product, it’s quite difficult to control. It’s great in principle, but not very practical.”
He started thinking about the concept of a three-wheeled vehicle, “so if it runs out of power it just stops, rather than falling over.” He thought it ought to be road-legal, capable of doing 25 miles per hour and going 45 miles on a single charge. From a full-sized 3D clay model seven years ago, the idea developed into the vehicle now known as the Raptor.
But the project – self-funded by Loomes and his brother David – cost around £200,000 to have it fully tested over the course of a year and then certified as road-legal by the UK authorities. Each Raptor has its own VIN – vehicle identification number – which allows it to get a number plate for road use in all EU member states. The authorisation process also allows fast-track registration in many other countries (apart from the US, where the vehicle doesn’t actually go fast enough to need a licence plate).
“We aim it at the B2B market at the moment: police use, airport use, shopping malls, big warehouses, postal services, last-mile delivery,” Loomes says. But not until 2012 did Loomes devote himself to the business full time, when a $500,000 order came in from the US.
The highs and the lows
Insisting, he says, on the quality control that only comes from manufacturing domestically rather than outsourcing to somewhere like China, the business set up a solar-powered factory in Leicestershire, England. “Although it’s more expensive to produce, that’s part of our ethical make-up,” Loomes says.
Unfortunately, that first order didn’t turn out to be the start of a great flow of business. “When you’re an entrepreneur, there’s amazing highs and crushing lows. We’ve had the factory at full pelt and can’t make the vehicles quick enough and then we’ve had to downsize.”
A critical learning point was how long it takes to nail down an order. “Generally, we’re dealing with governments, local councils, police, big companies. They don’t move quickly and they want to have a trial and test them for six or 12 months and then have a meeting to decide – which could take another 12 months,” he says.
Ecospin finds URICA
The business relies on distributors in places such as the US, South Africa, Israel, Mexico and Australia. The standard business model is that a distributor who receives an order from a local client then provides Ecospin with a purchase order and a 50% deposit. The balance is due just as the manufactured vehicles leave the factory and are despatched for delivery.
“But in some countries, we’ve really struggled,” Loomes says. “Particularly in North America: they want to order the product, they don’t want to put a deposit down, and they want it delivered to the end-user for 30 days before they pay. So we could be carrying the debt of that product for up to five months. That was a difficult gap to fill.”
For one client in Latin America, the company made an exception to their usual finance rule, asking for two-thirds up front in return for the distributor not having to pay the balance until they received the Raptors. “They made us wait eight months for payment,” Loomes says ruefully.
About three years ago, Loomes was talking about his financial challenges with friend Stuart Garner, the CEO and owner of Norton Motorcycles. “He recommended URICA, which is a platform that essentially fills the gap for small companies like us,” Loomes says. “He introduced us to them.”
URICA has helped Ecospin secure business that it might otherwise not have got. Distributors may not want to put down a 50% deposit on a 20-vehicle order – which would require them to part with around £100,000 of cash. “So if we say we can fill this funding gap, they’ll place the order and we’ll get the work,” Loomes says. “It costs a few percent here and there but we don’ think the distributors would have placed some of the orders if they had to try to fund them themselves. Having URICA on board has probably helped the bottom line by up to 20-25%.”
The way it works is that URICA approaches the distributor, gets some information from them, runs a credit check, and informs Ecospin how much credit URICA is prepared to allow the distributor. Assuming the credit limit permits, Ecospin goes back to the distributor and puts a pro forma invoice on the URICA portal for the distributor to approve. “He can read it, confirm it and then he hits ‘Accept’,” says Loomes. “That then releases a certain percentage of the money which comes straight to us.”
The small cost that Ecospin pays for that facility is offset by the fact that, if the end customer didn’t pay, then URICA would chase them. “We’re a small company so it’s difficult for us to chase them while URICA have got a lot of muscle,” Loomes says. He looked at factoring his invoices as an option but considered it to be more expensive – especially if the buyer goes bust. “With factoring, if the customer doesn’t pay, they come after you for the money. So there’s many benefits with URICA. Obviously, everyone is extremely well vetted that we deal with. Generally the people that we are dealing with are high-end companies that are well-established. When you’re selling vehicles you’re not dealing with a mom and pop outfit,” he says.
If there’s been one challenge along the way it is that the concept is a little too new for some distributors. “Some companies, particularly in Latin America, are reluctant to supply their accounts information because they’re not used to it. They say, ‘I’m going to buy these vehicles from Ecospin but you want me to give all my financial information to a third company?’ That can be a stumbling block, but generally hasn’t been a problem,” he says.
At present, URICA provides funding for up to three months, which is a bit less than Ecospin could do with. The lead time from accepting an order to getting the vehicles out the factory door is about three months, but then they could spend up to a month at sea. The end-user often wants to try the vehicles out for 30 days before paying in full. “So really, we’re pushing URICA to extend it to six months,” Loomes says. “Of course there’s more cost but they’re listening to what we’re saying. We could do more business if we were allowed the full five months.”
Ecospin is also talking to URICA about ways to pay its suppliers. “If we can get them on the URICA platform they’ll be paid immediately so they’ll be very happy,” Loomes says. “The only thing suppliers want is continuity of work and prompt payment.”
He is in no doubt about the experience of working with URICA. “This really works for us,” Loomes says. “We found that using URICA was the missing link in our business model internationally and has allowed us to do business that we probably wouldn’t have been able to have done without URICA’s help.”