Metsanotsu: How invoice finance helped a business sail through seasonality

invoice finance case studyMeet Metsanotsu (literally translated as Forest Piglet), an Estonian company that provides retail chains with great quality firewood. After encountering long payment terms from their clients, they decided to give Investly and invoice financing a try.

Having sold their first invoice to investors for a small discount, they’re here to share their experience. Metsanotsu is a perfect example where invoice finance can make a great impact on a business.

 

 


What is invoice finance?

Invoice finance allows companies to sell their invoices to a pool of investors for a small discount and receive cash immediately rather than wait out the long payment terms. This allows businesses to utilize money they have already earned much faster and put it to good work and grow their business. Once the invoice has reached its due date, the entity to whom the invoice is issued makes a payment to Investly’s account, and the funds are distributed amongst the investors who financed the invoice.

All of this can be done for a very small discount ranging from 1.5%-2.5% that already covers the fee and investors’ interest.

Metsanotsu’s situation involves seasonality. Since firewood is produced and consumed during the coldest time of the year – winter, cash flow can become trickier than usual. While the workers are busy cutting down trees and expecting their paychecks at the end of the month, the managers are stuck with every trick up their sleeve to cope with the 45-90 day payment terms stifling the company.

 

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Metsanotsu needed financing due to:

  • The demand for the company’s products is very seasonal
  • The production time is seasonal as well
  • The strong negotiating position of the customer, a retail chain with an extensive sales network

Outcomes:

  • Increased revenue
  • Increase in profits due to being able to bargain better prices from suppliers
  • Increased inventory turnover
  • No headache about who to pay first – the employees, suppliers, or service providers 

Alternatives:

  • Business loan from a bank – costly, unsuitable (the need for extra cash is mostly seasonal) and burdensome (the bank wanted guarantees)
  • Revolving credit - burdensome (the bank wanted guarantees)
  • Choosing who to pay first, who to pay later (way later) – damages the image of the company

 

Why did you decide to use Investly’s invoice discounting service?

After taking a look at how Investly works, I quickly realized that our companies could benefit a lot from each other. As the saying goes “Help us, and we’ll help you.” It worked.

 

What did you use the funds for?

Producing firewood is, to a large degree, dependent on weather. The same can be said about demand – nobody knows what the winter is going to be like before it arrives. There’s no point in keeping a large inventory, because a warm winter means you end up with cash locked up in your warehouse and you have to wait until the following season to unlock it. You have to be willing to top up your own inventory with outside supply. However, this also means you have to have extra cash on hand, which is something that young companies often struggle with.

We used the funds we received from financing our invoices to buy firewood from our suppliers. The demand for firewood went up five times due to extremely low temperatures in December and January. Our inventory was drying up and in order to fulfill our contracts with our customers, we had to buy more supplies from other vendors. Thanks to Investly, we had the extra capital that made it possible. Since we could afford to pay our suppliers immediately, we could ask for an immediate payment discount saving us even more money. That was enough to cover the invoice financing expense and then some. In other words, we didn’t lose a cent. In fact, because of the discount, we made a little bit of extra cash.

 

What other alternatives were on the table?

No other options were available to us. Local banks are very skeptical of small businesses, especially new ones. When I was at the bank, I got the feeling that I was not welcome there, that they couldn’t wait to get me out the door. The alternatives that banks were willing to offer were contingent on a mortgage, a personal guarantee, a commercial pledge or something similar. Revolving credit might have been a good alternative, but once again, it had strings attached.

Alternatively we could’ve made payments to our suppliers late on purpose. That would’ve supplied us with some extra cash at the expense of our suppliers. However, Estonia is a small economy, like an ecosystem in which everything is interconnected. I don’t think this is the right thing to do. As the saying goes: “Do unto others as you would have them do unto you”.

 

How did getting immediate access to cash help Metsanotsu’s business?

Producing firewood is a long process. As a rule, we don’t use machines to dry the wood because it would make the end product too expensive. We have to use free resources – the sun and the wind. There is no competing with something that cheap. It takes roughly 12 months from the time that a tree is cut down to the time we are ready to package and ship the ready product. Payment terms of 45-90 days add another 20% to the time that our capital is locked up.

Time is money. Getting immediate access to cash from our invoices is very important to us. Due to invoice discounting, we now have a 20% lead compared to our competitors. The result is increased inventory turnover.

 

What would you have had to give up were it not for invoice financing?

Normally a new and starting business will have trouble paying wages and taxes, getting supplies and covering current expenditures. That is usually followed by suppliers ending their contracts, which could lead to sanctions being imposed and contracts torn up by customers. That would’ve happened to us were it not for Investly providing a perfect solution.

 

Are you satisfied with the service?

We are very satisfied with Investly’s service. We got the impression that it doesn’t matter how much turnover a customer has – Investly still treats you as an equal. Moreover, the communication has been very honest and friendly. That’s refreshing to see from a financial company.

 

Would you recommend invoice discounting to other businesses?

For those that have a need for it, without a doubt!

 

 

Think your business can get a boost from invoice finance just like Metsanotsu?

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