Cash Flow

Net 30 days terms are great for retailers, especially if they can move inventory quickly. How does selling something and counting your profit BEFORE you pay for it sound? For businesses with this blessing, it means low capital requirements. However this good financial situation is at the expense of their suppliers who end up carrying higher capital requirements because of these payment terms.

For larger more established businesses, these capital requirements are not much of a financial burden. They usually have enough cash on hand to manage the float time, and have avenues for financing if things get tight. On the other hand, upstarts tend to be scarce on capital thus making 30 day payment terms much more of a burden. The fact that upstarts usually cannot qualify for any traditional forms of financing exacerbates this problem. However savvy entrepreneurs have a tool to help manage this problem.

This tool is called accounts receivables financing or “factoring” and it works as follows. Your accounts receivables are an obligation for a future payment. This future payment can be used as collateral to receive the payment immediately. This lowers your capital requirements, allowing you to leverage your working capital. As well, it turns your receivables in to a revolving line of credit; a line of credit that upstarts might not be able to qualify for from a bank. And to be honest, factoring might be more ideal then a traditional line of credit as a LOC will have a limit in the amount you can barrow whereas the amount of financing available through factoring will grow with your sales.

Another benefit of factoring is that it helps an upstart business build a business credit history. You can’t build a credit history without ever receiving credit. Factoring is just that and has provided the credit history for countless upstarts to receive the financing necessary to take their businesses to the next level.

If you just started a business, or are planning to start a business that could benefit from factoring, contact us to see what kind of factoring arrangement is right for you.