Following the blast of cold wind from the devastating economic turndown, there has rarely been a time when company bosses have been more anxious to find solid financial advice and information. Kirk Bryans, HSBC’s head of the European Receivable Finance Team, answers questions from one such company owner, David Shires.
DS: Perhaps I can start by setting the scene: my eight-year-old company, producing electrical circuits, has been trading across the EU successfully for the past six years, achieving a turnover of around £1.2m per annum. However, in the last two years we’ve suffered business losses, higher overheads and reduced margins, so the company now has an unseasonable cold that’s causing some concern in the boardroom. I’d like some basic first aid advice to start with, please, Kirk. For example, a key area of concern is our quite dismal cash flow situation. What is your advice on improving our cash flow situation?
KB (HSBC): Here at HSBC we find that the challenges facing your company are the same that many of our customers have been facing; it’s a common scenario, in the good times as well as the bad times.
In order to improve the cash flow situation it really comes down to two key points, point one, understanding who you are selling to: What type of buyer are they? Do they have a good history of payment? Are they who they say they are? And determine that if you deliver the goods, will you get paid for the products?
Point two is having a robust and experienced collections team to handle the chasing for settlement of your invoices. They should know the answers to the questions: Should I follow up to see if the goods have been received? Is there a problem with my product? Do I call this customer to collect the outstanding debt? When is it appropriate to call that customer? This can be a dilemma because the customer may be seen as your company’s lifeblood and a concern may be that you don’t want to be seen as too forceful. It can be a fine line between being too pushy for payment when a customer is likely to give you continued business.
Receivables finance is a solution that allows the customer to use the professional services, such as those HSBC offers, to effect positive results, alongside the funding that we can offer.
DS: This sounds attractive, because we have no expertise in the areas you’ve just described.
KB (HSBC): I think it’s the old adage: you let the experts do what they’re good at. Your expertise is in producing and selling electrical circuits – why don’t we let you fight from a position of power which is new business development, and don’t you then outsource the elements you may not be so good at, such as the collection of debt and obviously utilising the invoices as receivable finance? In the receivables finance business our expertise includes being able to identify the potential buyers who may be unlikely to fully honour the debt – we do this through a mix of our own internal database on all the customers we’ve dealt with in the past and we use some external sources such as third-party insurers, and so on.
DS: And with the cross-border trading territories that we have been developing for our electrical circuit supply business, we find it’s not difficult to get into a muddle when trying to call in debt.
KB (HSBC): Indeed, it can be complicated for companies that lack the expertise. Many times a company will operate well domestically but once they go across border, it can certainly get a bit muddled. So this is where HSBC can come in and really play to our strengths where we trade across Europe. We’re familiar with the local customs, even how long it takes to repay on an invoice – there are some countries where it’s sixty to ninety days on an invoice, for example, if you don’t know that, your expectation is set to what you’re used to.
DS: The personal face of banks seems to be something in the past. Can I expect to be in touch with an account manager when I come to HSBC with my business?
KB (HSBC): It really depends on the level of your business requirement and the extent of the business services we would be supplying. We can offer support from within many of the EU countries you may be trading with. We’re currently operating in eight EU member countries (soon to be nine, which will be Germany), so we have very hands-on experience to share with companies who are looking to develop cross-border trading. In those trading circumstances, HSBC would assign you a personal account executive from the start.
DS: With cross-border trading being a key development area for my business in 2010 and beyond, can you give me a brief overview of the relevant HSBC services available?
KB (HSBC): Each one of our EU operations has the expertise to finance against your approved sales invoices, in local currency; we can administer the loan (through our multi-lingual personnel), both in-country and from hub operations, so we have a value-added service; we have a system that provides the language relevant for the particular country that the customer is trading in to enable us to effectively collect the debt; we can provide insurance against customer failure; and we can provide support for companies that want to expand into other countries.
DS: I guess that the insurance against customer failure would be an expensive item?
KB (HSBC): Well, the costs here have increased with the economic crisis, as you might imagine. Third-party insurers are experiencing many claims, so the cost of that protection has gone up. But our customers need to weigh up the potential benefits against potential and irredeemable losses. So I would say it’s all relative to your requirements: an opportunity cost to enable you to trade securely.
DS: All this sounds very helpful and I’m finding your advice quite compelling. But, for a company like mine, somewhat frostbitten by potential bad debts, what costs are we talking about for these attractive HSBC services?
KB (HSBC): We have no set rate card, if you will, because our customers’ requirements vary considerably in a great many cases. Each and every deal is priced out according to the risk in the segment and the size of the customer (the number of invoices that they’re bringing, for instance). To take your company as an example, our receivables finance unit would provide a non-recourse insurance solution, we would administer the programme for you, we would fund all the approved invoices, and collect all those invoiced debts. That tariff would probably run one third of the cost when compared with the cost to you of bringing in a fulltime credit controller on the premises (and that one person will not have all of the recovery skills we can utilise). As I said earlier, leave this aspect to the experts, and concentrate on what you’re good at.
DS: Another compelling reason for companies like mine to be talking to HSBC. But, moving on, I also have another problem of a different kind: despite the cash-flow problem, I’m happy to say my company is actually quite well found and we have a considerable working capital, but this isn’t being utilised effectively. I have a real fear of losing capital by making a bad move, so you see, Kirk, I’m very risk averse. Can you give me some solid advice on some of the best ways I might maximise my working capital?
KB (HSBC): This throws up an interesting point. There are several things going on here: I think receivable finance helps a proportion of the risk and, as a whole, you should be seeking to sell to buyers who are likely to pay promptly – you could get advice from HSBC on ‘buyer worthiness’, we would help with payment collection and thereby remove a lot of the risk from the trade cycle.
There are a lot of companies out there at the moment that are lying low and are risk averse just like you. But we will come out of this crisis and it is those who have proactively looked for solutions, such as receivable finance, who will be on the front foot when the new opportunities arrive.
DS: In my case, I’m anticipating these new opportunities will be in pan-European cross-border trading. What’s your advice for this potential development?
KB (HSBC): Firstly, look for developing growth areas, of course, what will be the areas that will flourish over time. Secondly, understand the local markets, specifically the legal terms and conditions – don’t get into a market until you’ve done your research. Thirdly, know your customer so that you know exactly who you’re trading with. Fourthly, willingness to speak the language helps tremendously. Although English is spoken universally, even a few words or phrases in the national language will go down very well. This is one of the biggest benefits HSBC has in our operation, which is having people in our offices across Europe who speak the various languages. My four points may each seem obvious – but a lot of companies’ problems arise through not having adequate local knowledge.
In the second instalment of this discussion, Kirk Bryans of HSBC gives his opinions and advice on business loans, along with his forecast for SMEs for the rest of 2010. Meantime, if you would like to contact Kirk to find out more about how HSBC can help your company, email him on: