A profitable factory can face the wrong repayment date

A new machine may earn its return over several years, while a bank facility falls due in three months. An export order may have a healthy margin, yet its buyer pays after the factory must settle wages and material bills. In both cases, the business needs more than a low interest rate. It needs funding that remains available until cash arrives.

To match finance to the cash cycle, trace each use of money to a source of repayment. Give that repayment a date, then ask what happens if the date moves. A promise of future profit cannot settle a payment that falls due today.

This guide uses invented factory examples in currency units, or CU. Rates, fees and exchange rates are assumptions, not current offers. The aim is to prepare a sound business funding plan for review with the lender and the factory's finance advisers. Local law, tax rules and the signed agreement determine the final terms.

Separate three funding needs before choosing a product

Assets that support several years of work

A building or new machine usually serves more than one order. The same is true of most utility upgrades. The funding plan must cover the wait until the asset starts to earn cash. It must also cover the repayments that follow.

A machine's expected working life helps define the planning horizon. It does not prove that the machine can repay a loan of the same length. Demand, useful output, upkeep, product changes and resale value all affect the cash available. A five-year repayment term can still be too demanding if the instalments begin before the machine is ready.

Start with the complete cash requirement. The machine price may exclude freight and setup costs. Training, site changes and the first set of spares may also cost extra. Some items may be paid before the lender releases funds. Those dates belong in the plan, even if the accounting treatment of each item differs.

The working capital that stays in the business

A factory uses one roll of fabric and buys the next. It collects one buyer invoice while another remains unpaid. These items change, but a core amount of stock and receivables may stay in the business all year. That continuing need differs from a temporary peak.

Suppose a factory rarely needs less than CU200,000 to fund its operations. This invented amount is after agreed supplier credit. It rises to CU280,000 during a seasonal order peak. The CU200,000 floor needs dependable support. The extra CU80,000 may unwind when those orders are paid.

Under a matching policy, longer-term funds cover the continuing need. Shorter-term funds cover the temporary part. A more conservative policy covers some of the temporary part with longer-term funds. A more aggressive policy relies on short-term funds for part of the continuing need. ACCA's financial-management material explains this distinction.

These policy names describe a tradeoff. They do not establish that short-term money is always cheaper or that a longer loan is always safer. Compare actual prices, renewal rights and payment dates.

The temporary gap within an order

A confirmed order can need cash for fabric, trims and payroll before it generates a customer receipt. ACCA's working-capital guide explains the cash cycle between supplier payment and collection from sales. The average cycle is useful, but a dated order schedule reveals the actual peak need.

Do not confuse net working capital with the bank balance. Current assets less current liabilities is an accounting measure. Some assets may be stock or unpaid invoices. To meet today's payroll, the factory must turn them into cash or obtain agreed funding.

Follow one export order from deposit to collection

Consider an order with expected receipts of CU180,000. The customer pays a 20% deposit on day zero and the remaining 80% on day ninety. For this simplified example, the date is agreed and all receipts arrive in the stated currency.

The planned cash costs total CU150,000. These are the stated material, labour and shipping costs, plus the listed operating payments. There are no other cash flows in the base schedule. Interest, fees and tax effects are excluded for now and must be added before a real funding decision.

Date

Receipt or payment

Net cash movement, CU

Cumulative order cash, CU

Day 0

Customer deposit 36,000; materials 65,000

−29,000

−29,000

Day 30

Materials 35,000; labour and operating payments 28,000

−63,000

−92,000

Day 60

Labour and operating payments 17,000; shipping 5,000

−22,000

−114,000

Day 90

Customer balance 144,000

144,000

30,000

The final CU30,000 cash surplus is not the amount needed to fund the order. The greatest cumulative gap is CU114,000, just before collection. A funding request based on the final surplus would miss the problem.

The deposit also cannot be counted twice. It reduces the early funding gap and leaves only CU144,000 due later. A forecast showing the deposit at the start and the whole CU180,000 again at collection overstates available cash.

Each date needs evidence. The customer's order supports the receipt terms; supplier agreements support material payments. Production plans support the timing of wages, processing and dispatch. Payment may depend on accepted documents or a passed inspection. Allow for that condition when setting the collection date.

The International Trade Administration's trade-finance guide explains how export working capital supports the period from buying materials to collecting payment. Its government-programme details concern eligible US exporters. They do not establish eligibility for a factory in another country.

Convert the cash gap into a funding amount

Suppose the factory has CU45,000 of unrestricted cash allocated to this schedule. Management has set a CU15,000 minimum balance for this example, leaving CU30,000 available to absorb the order's gap.

The base peak draw is therefore:

CU114,000 peak gap − CU30,000 usable opening cash = CU84,000

This is the amount of borrowing needed to preserve the assumed minimum balance before interest and fees. The minimum is a planning choice, not an industry rule.

At day zero, opening cash of CU45,000 less the CU29,000 net payment leaves CU16,000, so no borrowing is needed yet. At day thirty, cash without borrowing would be negative CU47,000. A CU62,000 draw restores it to CU15,000. Day sixty requires another CU22,000, bringing debt to CU84,000.

When CU144,000 arrives on day ninety, the factory can repay CU84,000 and retain CU75,000 before financing charges. This equals the original CU45,000 plus the CU30,000 order surplus. The agreement must allow the planned draw and repayment dates.

A real factory must add its other orders to this schedule. Taxes, asset payments and existing loan payments also need their own dates. Money already committed to another purpose is not available opening cash. Nor is a restricted deposit freely usable simply because it appears in a bank account.

The order and machine examples in this guide are separate. If they occur in the same factory, their cash plans must be joined before approval. Suppose the machine's CU30,000 owner contribution comes from the CU45,000 opening cash used above. Only CU15,000 then remains for the order, all of which is needed for the assumed minimum balance.

The order's peak borrowing rises from CU84,000 to CU114,000. The change is exactly the CU30,000 diverted to the machine. If owners instead inject new cash for the machine, the order's opening balance can remain intact. The plan must say which case is real and show when the new money reaches the account.

This check prevents two individually balanced proposals from creating a combined shortfall. Each proposal may look sound until the same bank balance appears as its funding source.

The facility amount also needs enough room for its own charges. If fees are deducted from the advance, a CU84,000 nominal loan may deliver less than CU84,000 in usable funds. Enter that deduction on the day it occurs.

Test whether the facility survives a late receipt

Now move the buyer's final payment from day ninety to day 120. Assume the delay adds CU18,000 in operating and holding cash costs. No new receipts offset these costs. This is a separate downside case, not a claim about every delayed shipment.

Borrowing rises from CU84,000 to CU102,000 to preserve the same minimum cash balance. A CU100,000 facility would be CU2,000 short even before interest and fees. The order may still produce cash overall, but the planned limit cannot carry this scenario.

There is a second issue: maturity. A facility due on day ninety cannot simply be assumed to continue until day 120. Has the lender agreed to an extension? Is it still under review, or is it unavailable? The plan must show the answer. A hoped-for replacement loan remains an open condition until the factory secures it.

A larger deposit or an agreed stage payment could reduce the gap. More committed funding or a revised order schedule may also help. Each choice needs a fresh cash calculation. New supplier terms require agreement before the payment is due. Paying late without that agreement does not change the terms.

Avoid using one optimistic forecast to support every decision. The sales team may expect prompt collection while production expects a delay in dispatch. Finance needs a joined-up case that places both events on the same calendar.

Give a machine purchase its own repayment test

Consider a separate machine project with a total installed cash cost of CU120,000. Owners contribute CU30,000, and a proposed term loan provides CU90,000. The lender advances the full principal without deducting fees in this example.

The principal is repaid in equal monthly amounts over 36 months. Interest is added each month on the opening balance. The hypothetical annual nominal rate is 12%, charged as 1% per month. This is an equal-principal structure, not a loan with equal total instalments.

Monthly principal = CU90,000 ÷ 36 = CU2,500

Month

Opening debt, CU

Principal, CU

Interest, CU

Total payment, CU

1

90,000

2,500

900

3,400

2

87,500

2,500

875

3,375

3

85,000

2,500

850

3,350

Principal repaid in the first year is CU30,000. Interest on the twelve declining opening balances totals CU9,150, so first-year debt service is CU39,150. This must come from available cash, not from the depreciation charge in the accounts.

The repayment term is only one part of the test. If useful production begins in month four, the first three payments still total CU10,125. The funding plan must identify where that cash comes from during installation and startup.

Do not assume the CU30,000 owner contribution covers it. In this example, that entire amount already pays part of the installed machine cost. Using it again for early instalments would double-count the same funds.

A repayment holiday may help with timing if the lender agrees. It may also add interest or move larger payments later. Put the revised amounts into the schedule instead of treating the holiday as free funding.

The project still needs a sound operating case. ApparelDiary's capacity-investment decision guide examines project choices under uncertainty. Funding approval and project value answer different questions; both need to work.

Check cash available for debt service

Suppose the project and the supporting business can provide CU52,000 for this loan in year one. This is the cash left after operating payments and taxes. The example also deducts increases in working capital and required maintenance spending. It excludes this loan's principal and interest, which are the payments being tested.

The illustrative coverage calculation is:

Cash available ÷ scheduled principal and interest = 52,000 ÷ 39,150 = 1.33 times

This is a defined planning measure, not a universal lender covenant. A lender may define the numerator, permitted adjustments and payment obligations differently. Use its actual definition when checking compliance.

At one times coverage, the stated cash only just meets the stated payments. There is no spare cash within that calculation. Annual coverage also says nothing about a shortage in a particular month, so retain the dated schedule.

Now test weaker cash generation and a higher rate:

Case

Cash available, CU

First-year payments, CU

Coverage

Base: 12% nominal rate

52,000

39,150

1.33 times

Lower cash, same rate

39,000

39,150

1.00 times, rounded

Lower cash, 15% nominal rate

39,000

41,437.50

0.94 times

The rounded one-times result in the middle row hides a CU150 shortfall. The final case has a CU2,437.50 shortfall. Show the cash difference beside the ratio so rounding cannot turn a failing case into an apparent pass.

The higher-rate case assumes the same opening balances and principal schedule, with monthly interest of 1.25%. It is a scenario for an exposed or repriced facility. It does not change the rate on a fixed-rate contract.

Compare funding structures by their obligations

Term borrowing and revolving facilities

A term loan can spread an asset's cost over an agreed period. Its payment schedule may still be poorly matched to seasonal cash receipts. Check when principal is due and when interest may change. Review any large final payment and the terms that could bring repayment forward.

A revolving line may allow borrowing, repayment and borrowing again within agreed terms. Its headline limit is not always the amount available today. Existing borrowing uses part of the limit. Rules about eligible stock and invoices may reduce access further, as can lender reserves or other terms.

An overdraft may help meet short timing gaps, but its legal terms matter. The British Business Bank's overdraft guide explains that UK overdrafts can be repayable on demand and may carry fees. Read the actual facility terms before treating such funding as a dependable source for a long-lived machine.

If a revolving balance never reduces after orders are collected, investigate why. The balance may fund the continuing working-capital floor or past losses. An asset purchase or unplanned withdrawals could also explain it. Repeating a short extension does not explain which need is being funded.

Equity and money retained in the business

Equity brings funds in exchange for an ownership stake. It does not create the same scheduled principal payments as an ordinary term loan, but it has an economic cost and may change control. The British Business Bank's finance overview distinguishes debt repayment from investment for a stake.

Review voting rights, information rights, distribution expectations and exit terms. A shareholder loan is debt unless its terms and the applicable rules establish otherwise. Calling all owner funds “capital” can hide a duty to repay them.

Retained earnings are also not a separate pot of cash. Past profits may already fund machines, inventory or receivables. Before assigning them to expansion, identify the unrestricted cash that remains and the commitments it must meet.

No fixed debt-to-equity split suits every factory. A new factory may not know how reliably buyers will pay. An established factory with stable cash and spare borrowing capacity faces a different funding choice. Tax treatment alone cannot decide the choice, and interest deductions depend on the applicable rules.

Leasing and hire purchase

Asset finance can provide use of a machine without paying its whole price at the start. ACCA's leasing and hire-purchase guidance explains how payment and ownership arrangements differ.

Compare the upfront payment and regular charges. Include any final purchase option or large final payment, often called a balloon. Check who pays for upkeep and the cost of an early exit. Who owns the machine if the factory closes, moves or changes its product route? Accounting and tax treatment need their own review. A lease does not automatically keep all obligations off the balance sheet.

Look beyond the advertised interest rate

Two offers with the same stated rate can produce different cash demands. One may deduct an arrangement fee at the start. Another may require a cash margin, charge for an unused limit, or have a large final principal payment.

Put each offer on the same dated cash schedule. Separate funds actually received from amounts described as approved. An offer may require legal fees, a valuation or insurance. Add each charge to the plan when the offer or another verified requirement supports it.

Approval and access to funds are different events. Before release, the lender may need signed security documents or a valid supplier invoice. It may also need proof that the owner has paid their share. Map these conditions to the first payment date. If they remain unmet, approval alone cannot fund an earlier deposit.

Also check who receives the advance. A machine lender may pay the equipment supplier directly. That settles the asset bill but does not put cash into the factory's payroll account. Show the direct supplier payment on its own line. Keep proof of payment, and distinguish it from cash available to run the factory.

Security deserves its own review. A charge over essential equipment or a personal guarantee can affect more than the proposed project. Check existing security commitments and the consequences of default. A lender's willingness to take collateral does not prove that operating cash can service the debt.

Currency can also change the burden. Suppose a debt payment is 100,000 foreign-currency units. At an assumed rate of 100 local units per foreign unit, it requires 10 million local units. At 110, it requires 11 million: one million more.

Suppose 70,000 units of receipts in the same foreign currency arrive on time. If they are free for this payment, only 30,000 need conversion. The same rate movement then changes that conversion cost by 300,000 local units. The match fails if the receipt is late or already committed elsewhere.

The trade-finance guide's foreign-exchange section explains the risk from currency movements. A factory's currency plan should cover amounts and dates together. A suitable, permitted hedge has its own terms and costs. The plan should not rely on guessing a favourable exchange rate.

Protect due payments while preparing the funding case

Wages should appear on their due dates in the cash plan. Delaying earned pay is not a routine financing source. The ILO's wage guidance supports regular payment. The exact deadlines and remedies must be checked against local law and the applicable agreements.

The same discipline applies to taxes, agreed supplier payments and existing debt. If the forecast exposes a gap, raise it early enough to arrange a lawful, agreed response. Moving a payment date in a spreadsheet does not change the obligation.

A funding request should explain what the money will fund and when it is needed. Show the amount, the source of repayment and a downside case. Attach the evidence behind the main assumptions. ACCA's application guidance calls for a clear purpose, financial records and cash forecasts to support the review.

For an expansion, ask production and engineering to confirm the installation and ramp-up dates. ApparelDiary's capacity and order-promising guide can support that operational check. Delivery does not mean the machine can reach full output at once. Finance needs the expected start date and the time needed to build up production.

The final plan should make one relationship clear: each repayment has a realistic cash source before it falls due. The plan may depend on a loan extension, buyer receipt or production date that is still uncertain. Name that condition and who will follow it up. That gives the factory a funding decision it can monitor as the work proceeds.

References