Cash flow is the life blood of business. Understanding and managing cash flow successfully is usually the difference between the successful businesses and those that fail. This becomes particularly important during a cash flow crunch.

Cash flow issues can happen for a number of reasons. Customers fall behind in payments. Manufacturing, shipping or other business costs rise. Business growth is soaking up working capital and so forth. The following provides strategies to help get through this rough time.

Small businesses are prone to getting strapped for cash. Although it is first instinct to look for sources of outside funding, looking within might provide a faster and more affective solution.

You might be thinking, ‘are you crazy? Where can I find cash within my business?’ Take a look at your books, specifically your accounts receivables. Would having 80 percent of that balance today put your business back in good standing? Then invoice factoring is the solution to your businesses cash flow needs.

Factoring is affectively the sale of an asset. Accounts receivables are simply a future cash flow that a factoring company will purchase at a discounted rate. In exchange for this discount, the business receives immediate cash flow for use in their business. As well the factoring company will assume the invoice as there own and thus will provide accounting and collections services, as well as a package of other benefits.

Because factoring is the sale of an asset, it creates no new debt. This is apposed the business credit lines and loan arrangements that create a liability. The factoring company gets paid back by your customer which means there is no added liability for your business.

Another key characteristic of factoring that it provides fast access to capital. Banks have to go through many processes ensure that their clients are credit worthy before they approve a loan. Factoring companies require due diligence as well, but their process is much more streamlined and they can usually disburse funds 24 to 48 hours from the time of application. This means that your cash flow worries can be over ASAP and business can keep running as usual.

Sam’s club has begun wearing a new hat; Business lender. They offer business loans through the SBA’s community express program. To be precise, they are not actually making the loans, they have partnered with Superior Financial Group, a leading SBA lender.  This seems like a strange fit for Sam’s club, a large retailer, to be playing financier. But it highlights an important shift in how businesses are demanding money; they want it quick and easy.

Factoring is has always been a reliable way for businesses to gain access to capital. However this is particularly true with businesses that have financially strong clients.

Here are a few examples of businesses that would likely be turned down by a bank but would be a great candidate for factoring:

- A highly leveraged importer that sells to large retailers.

- A start-up Recovery agent that does jobs for large auto-finance companies.

- A small landscape company that won a contract to maintain a large commercial property.

In the current lending environment, these businesses would be hard pressed to receive a bank loan. However these businesses would be able to get the working capital they need to continue or expand operations through factoring. So, how come the banks won’t deal with a company but factors will?

To answer this question we must look at the difference between the two types of lenders. Banks provide funding by issuing debt that is to be paid by their client. Factors provide cash through the sale of an asset; they buy existing debt from their client that is to be paid by their client’s customer. All finance companies are primarily concerned with the credit of the parties that are obligated to pay them. This means that banks are going to look at your business’s credit, and factors are going to primarily focus on the credit of your customers. This allows the businesses listed above to receive funding based on companies that are far more credit worthy than themselves.

Another key benefit of Factoring is highlighted by the example of the highly leveraged importer. Banks are likely to turn down a loan application from a business that is highly leveraged, regardless of that business’s credit, because they already have a great deal of debt on their books and are thus viewed as risky. Factoring is an “off the balance-sheet” transaction, as it creates no new debt. This is good for companies that are looking to get a bank loan and want to clean up their financials but still need working capital. It’s also good for businesses that are already highly leveraged and just need that last extra bit of financing to get them to the next level.

A recent survey of business owners by the NFIB has gotten a lot of attention. It showed that small business owners are pessimistic about the current state of the economy. Other data suggests that small business lending is down (This article is exceptional, please read) due to the expiration of stimulus measures that offered 90 percent guarantees on SBA loans. Although there may be new legislation to return guarantees to 90 percent, it may take some time before it becomes effective. There are also talks of a double dip recession that could undo the recovery process and send us into another recession.

With the current uncertainty, managing business risk is of utmost importance.

A financing decision that the State of California is in the process of making is the perfect model of how asset based lending can be used. The State of California needs money to run their organization (sound familiar business owners?). However the State is not in a good position to take on more debt. In their case it is because they already have a great deal of debt but in the case of business owners, they may be too small, too young or perceived as “too risky” to borrow. However the State of California has an asset, in their case office buildings, that they are considering using as collateral in a ‘sale lease-back’ arrangement so that they can make use of the cash value of the asset while still maintaining use of the property. This is the prototypical model for asset based lending. Let me break it down further.

Purchase order financing is a unique form of financing that can be utilized very profitably. It essentially makes it possible to handle orders that otherwise would have not been financially possible or responsible to take on. This means that Purchase order financing or PO financing increases a businesses ability to make sales and thus make profits.

It also has positive affects on a business’s cash flows.

The current recession has created a bleak lending environment for businesses and new data suggests it is getting worse. Today Federal Reserve Chairmen Ben Bernanke said that “many “creditworthy” firms with “strong” cash flows are having trouble getting loans.” This statement was based on data showing that S.B.A. lending has seen a two-thirds drop in the month of June compared to May, to bring it to the lowest levels in decades. Bankers say this steep drop is due to the expiration of a bill that provided higher percentage guarantees of loans made through the S.B.A. program.

With the S.B.A. taking a big hit, business’s have increasingly turned to asset based lending as it is usually the only option left open to them.

Picking the right factoring company is very important.  Unlike most other forms of financing, a factor has a day-in day-out relationship with their clients which means that first and foremost you need to like the people you will be dealing with. As well you will need to trust that they will act in your best interest and provide a quality service to your business. Here are 8 items to consider when deciding if a factoring company is right for you.

Much is said about the high cost of factoring and there is some truth to these claims. Two to six percent over thirty days is a lot when compared to the annual interest rates banks offer. However, comparing factoring to a bank loan is flawed comparison from the start as outlined here. In addition, with the current lending environment so tight, less expensive forms of financing may not be available. Comparing the cost of factoring to the funds your business cannot qualify for is not realistic. A better way to determine if factoring is expensive is by considering how the funds will be used.

Factoring is best suited for growing companies for many reasons. First,