Case Study
Paul’s Puzzle Business
Paul retired from his full-time job in 2018 and started a small business as a sole trader. The most Paul wanted to work was two days a week. He produces wooden puzzles which are sold to two large retailers. Paul’s main aim when starting was to make an operating profit of £20 000 a year to add to his pension. Since starting, Paul has more than doubled this profit figure. He has worked more than expected but has really enjoyed it.
Trends for the puzzles change quickly. Paul can respond immediately by altering the designs produced. Paul provides the puzzles to the retailers but receives payment three months later. He makes a large gross profit margin. Paul worries about having to pay his supplier for all material costs even if puzzles do not sell. Last month, sales hit record figures and now the retailers owe Paul a large amount of money.
Paul’s supplier usually sells to him in bulk. The supplier has offered an excellent one-off half price deal on materials for orders by the end of this month. Paul is keen to take up the offer. However, he does not have enough cash available to do this. Paul’s bank manager advised him that interest rates on loans would be 6% and are rising very rapidly. Another lender said they could arrange a debt factoring agreement at 85% of any sales invoices.
Recently, Paul has been contacted by an investor, Holly. Holly has no experience in this market but is impressed with Paul’s business. She believes she can help him to expand but insists that Paul’s business would have to be turned into a private limited company. Paul would maintain a 40% share and she would own the rest. Holly would buy new machinery to help Paul make more items. Holly has promised she can increase profits by 300% but she would make all the decisions. This would allow Paul to go back to working two days a week.
Analyse the factors Paul might consider when deciding whether to use debt factoring to improve cashflow.
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