The phrase “business 2 business companies” is often used to describe businesses that trade with other businesses rather than sell to the general public.
Business to business trade is quite a bit different to that of business to consumer and, if you are thinking of setting up, or investing, in such a business, then there are a few things to bear in mind.
The first thing to consider is the size of the average transaction which will undoubtedly be much larger than a business to consumer one. It is much more likely to be many hundreds, or even thousand of pounds and such orders can prove to be poison chalices.
For a small business, an order running to tens of thousands of pounds can seem like a fantastic opportunity, but seller beware. Beyond the obvious issue of delivery, the two biggest problems encountered in such orders are often two sides of the same coin, namely cash flow and payment terms.
For small businesses supplying goods, commercial terms from suppliers are likely to be fairly tight: 30 days, or even payment in advance. Unless similar terms on payment can be obtained from the customer, then the business can be forced into a tight cash flow corner very easily. Of course we might expect our bank to help us out – after all it’s not like we can’t see where the money is coming from to pay them back.
The problem with banks is, of course, that (I know there is big list) they are not known for acting especially quickly and, if you are trying to close a deal, it may just be impossible to keep all of the balls in the air long enough. The other problem is the tendency these days for the banks (especially in an emergency) to step over the company line and ask for personal as well as business guarantees. This is something to be avoided at all costs – especially where there is any risk associated at all.
Another problem with bank finance is that, should you get it, you will also be faced with lots of associated arrangement fees, management fees, etc, which will eat into the profit on the contract. This aspect can be easily overlooked when evaluating the worth of the contract, especially if the timescale to obtain finance is tight .
Should the cash flow problem be solved at the outset, it is worth noting that, according to some recent research, UK small businesses are paid 41 days late on average. On the basis of a typical 30 day invoice, that is a 71 day lead time from the bill going out to the cash coming in. Note that this is an average and could be much worse. Furthermore, larger businesses often quote an invoice payment lead time of more than 30 days (i.e. force their terms on you) and, if you have agreed to such terms and the customer is late in paying, this could prove to be very stressful indeed.
In fact, this sort of enormous cashflow problem is estimated by the EU as being responsible for 25 per cent of European corporate bankruptcies. This is probably a higher percentage in construction businesses. It can be very much a “be careful what you wish for” scenario.
None of this is a reason not to enter into business to business trade, it is simply a warning about the risks involved. Much of it can be mitigated by establishing better terms at the negotiation stage and doing things like offering a discount for advance, or prompt, payments will often result in higher profits when the cost of finance and the opportunity cost of restricted cash flow is factored in. That is, a squeeze on cash flow caused by a larger job may result in other smaller jobs having to be turned away if the money is not there to support them.
The big upside of business to business is not dealing with the general public. For those moving from a business to consumer background this will feel like dealing with adults instead of children. This, together with (generally) fewer transactions can feel very advantageous.
As a final surprise in this area, in some parts of the country business support grants are still available and are being focused on businesses that trade with other businesses.
For the more sophisticated investor, or business person, business 2 business companies can be a great investment and certainly worth considering.