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.

Sell more. Particularly if you can sell COD. This will get cash flowing through the business and will help the top and bottom lines. However, if selling COD is not an option then this might not be the best strategy, and might actually  make the situation worse.

In this case putting effort into collections might be the better bet. If the business does not sell on COD terms then customers definitely owe money. Take a look at the aging schedule and see if customers are past due on payment. If so, take all appropriate steps to expedite their payment.

If cash reserves are still low, try negotiating with your suppliers. If your business goes under, they lose business; it’s a lose, lose. Hopefully they will be willing to work something out with you. Ask them to offer 30 day terms if they do not already or a special discounted rate. If the business has been a good customer and had a long relationship with the supplier, they should be able to work something out.

Cutting overhead is always an option. With the state of the economy, particularly in commercial real estate, negotiating lower rent with your landlord may be a fruitful endeavor. If they are not budging, moving to a smaller or less expensive location can be an effective way to cut overhead. Also, take a look at general expenses.  If there is a way to cut consumption of power, water, labor, material; any way to make business processes more efficient could prove valuable to the cash flow position.

Lastly, look at outside financing. Asking the bank to raise the limit on your line of credit could provide the necessary breathing room to get out of the current crunch. However, it is usually bad policy to ask for financing from the bank when in crisis; banks are less likely to grant your request. If this is the case, turning to an accounts receivables factor is a solid option. They will allow businesses to gain immediate access to around 80 percent of a business’s receivables base. As the business makes more sales, the factor can provide more funding if needed to assist the business through their cash flow crisis and get them back in good standing.

Fix Your Cash Flow Crunch: Factor is a post from: Factor Direct Capital

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.

Need Financing? Look at your books is a post from: Factor Direct Capital

That is the essence of the Community Express program that offers smaller loans, from $5,000 to $25,000, and the most streamlined application process among SBA loans. The program aims to fill a key void in small businesses lending by targeting smaller companies that are traditionally underserved by banks.

To be exact, these businesses remain underserved by banks, because Superior Financial Group is a non-bank lender. Banks are currently tight in their lending, especially for small businesses. This is why non-bank financing has become increasingly prevalent in this recession. Small businesses have turned to sources of financing that wont waste time and will approve their funding requests. This means that non traditional lenders have become the essential suppliers of capital while the banks are on the sidelines.

These non traditional lenders come in many forms. Community Express loans are a solid an option in this respect. However businesses that cannot qualify still have alternatives. Asset based lenders provide a range of financial products that can provide much needed access to capital. PO financing, factoring are two asset based financial tools that are generally available to businesses that have been turned down by other lenders. These forms of finance help leverage the credit of a business’s customers. This means businesses can gain access to capital based on their customer’s good standing.

One fundamental problem with PO financing and factoring is that it can only be utilized by businesses that have commercial clients IE B2B companies. However, a merchant cash advance can fill the void for retail businesses and provide much needed access to capital. It essentially borrows against a business’s future credit card sales to provide an immediate lump sum. This is another non bank solution to small business financing.

The moral of the story for small business is to think outside the bank. Alternative lenders will provide quicker and faster capital with less probability of getting turned down thus less wasted time. Truly superior value when compared to a bank.

Sam’s club SBA lending highlights a new trend: fast capital is a post from: Factor Direct Capital

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.

Leverage your customer’s credit is a post from: Factor Direct Capital

With the current uncertainty, managing business risk is of utmost importance. Survival is the name of the game right now and adding operational expenses is only for the ultra-confident or extreme risk-takers. This is why it is a great time to consider factoring as opposed to bank loans to finance operations. Bank loans create a liability that adds to operational expenses. This fixed obligation could become a burden when cash flow gets tight, thus it creates financial risk. Factoring, on the other hand, creates no new debt and thus no new financial risk. On the contrary, factoring is more akin to the sale of an asset. You ‘sell’ all, or a percentage of your receivables and receive cash for business operations immediately. I say ‘sell’ because factoring is technically an assignment; a factor buys the rights for a payment on a receivable. This means the customer bears the obligation to make good on the receivable, while you use the money for day-to-day operations. This means that factoring creates no new financial obligation and thus no new financial risk.

Factoring is also good for this uncertain economic climate as it is a very flexible financial arrangement. Because factoring amounts to a short term cash advance, it is easy to adjust the amount of financing needed at any given time. If the economic climate changes, factoring can be cut-off or increased depending on what is best for the new situation. The same cannot be said for a standard bank loan; businesses are locked into terms no matter what happens with the economy. Using factoring in this uncertain climate is a good way to stay aggressive but still hedge your bet.

Factoring can actually help reduce certain risks a business is exposed to, specifically the risk of non-payment from a customer. This is because factoring companies run credit checks on all of their client’s customers. This provides valuable insight on the financial position your customers are in. Offering trade credit to businesses that are not credit worthy is a very risky proposition which becomes all the more risky if the economy gets worse. Factoring can provide the information to make informed decisions that will help manage risk exposure.

Factoring and Business Risk is a post from: Factor Direct Capital

Asset based lending is generally (but not always) utilized as an alternative to less expensive bank loans simply because  asset based funds tend to be more expensive. If it is truly used as an alternative, or in other words, bank loans are not available then asset based lending is a great avenue to gain access to the vital capital needed to maintain or grow business operations.

In the case of the State of California, they have an asset in the form of office buildings that have been valued at as much as $2 billion and they would like to use that money for operations. However, California would also like to maintain use of the property. For this situation, a financial tool called a “sale lease-back” is what California is considering utilizing. In a ‘Sale lease-back” California would sell the building to a financial institution for a lump sum of, lets say $2 billion. The financial institution then leases the property back to the State of California. This allows the State to access the equity in the building while still maintaining use of the asset.

Businesses can use similar tactics to gain access to capital even without a balance sheet full of large assets. Purchase orders, accounts receivables, and inventory are all assets that can be used as collateral to gain access to capital.

The main advantage to asset based lending is that it is widely accessible to businesses in all types of credit situations. Whether it is a new business with no credit, or a business that has had credit issues in the past, asset based lenders can almost always make the situation work. As well, this lending situation will allow these businesses to a build credit history that they can use to qualify for different types of financing in the future.

Factoring, PO financing, inventory finance, equipment finance, sale lease-back, merchant cash advance are a few of the many options for financing that are widely available to companies that fit their lending model.

State turning to asset based lending is a post from: Factor Direct Capital

It also has positive affects on a business’s cash flows. A common situation for a business that seeks out PO funding is their suppliers want them to pay COD but their customers want 30 day terms or longer. We have seen businesses that regularly wait 180 days from the time they pay suppliers to the time they get paid from their customers. Purchase Order financing can help manage cash flow in situations like this. It can also be used to finance business growth. When demand is high businesses can have trouble financing sales growth. PO financing will fund the projects so that your company does not have to turn down business, helping your top and bottom lines. This is why PO financing can be a very profitable form of financing.

How does it work?

A purchase order financing arrangement starts with an agreement to buy usually in the form of a purchase order from a customer. After this agreement is made, the PO financing company will pay the cost of producing the goods. Once the goods are shipped and accepted an invoice is sent to the end customer. The invoice is paid directly to the PO financing company, and they take out the amount they advanced along with any fees and return the rest as profit to their client.

Purchase order financing is ideal for Small to mid-sized businesses for many reasons. It is ideal for growth as outlined above but it is also a widely accessible source of funds; deals are rarely denied based on credit history. This is essential as bank loans are currently very difficult to qualify for. PO financing is also fast source of funding compared to bank loans. If a large purchase order comes in, there will not be time to wait and see if financing is available; PO funding companies are very responsive in that respect and can react quickly to new deals.

However purchase order financing is not for every business type. It is generally used by manufactures, wholesalers, and distributors. It usually cannot be used at the retail level or for service based businesses (B2B services could look to factoring). Purchase order financing is also not well suited for businesses with low margins. The cost of capital in these arrangements is high and if margins are too low then it will not make financial sense to utilize this form of financing.

Purchase Order Financing is a post from: Factor Direct Capital

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. Asset based lenders will lend when banks wont for two main reasons. First, the amount of funding is determined and secured by the value of an asset. The second reason is that asset based lenders are forced to take a more hands-on approach by monitoring transactions rather than simply collecting periodic payments. These extra steps to manage risk enable asset based lenders to make loans where banks will not, but it also leads more expensive funding.

Despite the high cost, the demand for financing is high and asset based lending provides much needed supply. However the venture into asset based lending might require a bit of homework for the business owner as there are many forms to choose from.  Purchase order financiers, inventory lenders, accounts receivable factors, equipment financing companies, real estate lenders, etc. are all asset based lenders and each unique type of financing has a different set of benefits, draw-backs and affects on the bottom-line.

However, it appears that asset based lending will continue to increase it’s role in the lending environment. The new initiative that would make S.B.A. loans more appealing to bankers is in the early stages of working its way through the Senate and House. Even if it passes, it might take a considerable amount of time before it is enacted into law. This means that S.B.A. lending levels are likely to stay historically low and business owners will have little other choice but to turn to asset based lenders to get access to the capital their businesses need.

Asset Based Lending is a post from: Factor Direct Capital

Direct lender

First and foremost, make sure you are working with a direct lender. There are many websites that appear to be legitimate factoring companies but they are actually just brokers that will pass off your information for a commission. This is not the worst thing that could happen, but dealing directly with a lender ensures that you can decide what company is the best fit for you. (rather than which company will give the broker a larger commission)

Familiarity with your industry

Some factors specialize in one industry, whereas others deal with all types of businesses. Going with an industry specific factor will ensure that they are knowledgeable in your field. Even if a factor does not specialize, ask if they have worked with businesses like yours in the past. This will ensure that the factor is a good fit for your business and vice versa.

Account management

It is best to have a dedicated account manager. This will make dealings less confusing and more personal as there will be only one person to contact for all of your factoring questions, needs, concerns or issues. As well, you will build a relationship with that person, which means they will be more likely to cater to your needs and will work harder to keep you happy with their service.

Time it takes to disburse the funds

Considering how fast they can respond to requests for funds is important because factoring is about timely cash. If a factoring company cannot get you funds on the same day or within 24 hours, it should not be hard to find one that does. A 2-3 day wait time could be the difference between making payroll on time or not.

Customer relationship management

You have worked hard to build relationships with your customers; you do not want a factor to disrupt this. Ask the factor about their collections policies and how aggressive they are with collections. Some factors will allow their client to handle collections or offer non-notification factoring if this is a concern.

Fees

Every factoring arrangement has factoring fees; they are calculated as percentage of the face value of an invoice. However some factoring companies will charge other ‘setup fees’ or ‘service charges.’ It is probably in your best interest to avoid these factors, or at least to fully understand their fee structure before you commit to them.

Volume requirements

Virtually all factors have a certain monthly volume range that tends to be a guideline for clients they will work with. Some factors will deal with clients that have receivables volumes of $100,000-10 million monthly, and other factors might deal in the $5,000- 100,000 range. Point being it is important to know which factor is suited for your business volume.

In addition, some factors will require their clients to factor a monthly minimum amount of receivables whereas some have no monthly minimums. Choosing a factor with no monthly minimums is the most flexible arrangement as you are not obligated to factor in the event it is not needed.

Contract length

Lastly, some factors require that you have at least a year contract with them. Others offer month-to-month contracts. You should consider how long factoring will be needed for business operations before you commit to contract. If you will need it for well over a year then this should not be an issue, but it is smart to not over commit. Contracts can always be extended, but getting stuck factoring when it is not longer advantageous should be avoided.

What to look for in a factor? is a post from: Factor Direct Capital

Factoring is best suited for growing companies for many reasons. First, the amount of funding that a factor can provide is based entirely on sales. Because of this, growing companies can use factoring as a source of funding that will grow with their business as opposed to more traditional loans or lines of credit that will inevitably run out. As well the funds from factoring are ideal for financing sharp increases in sales volume. If factoring allows your business to handle more sales then factoring is directly increasing your top and bottom line. If cash flow issues are the reason your business is turning down sales then it is likely more expensive to not be factoring.

Another great use factoring funds is to take advantage of volume discounts and/or early payment discounts.  This can effectively offset the cost of factoring which essentially means your business could take advantage of some of factoring’s peripheral benefits for free. These benefits will outsource essential duties allowing you to focus on your core business.

These are some of the examples of situations where factoring makes financial sense. However factoring is not always a good fit, and in some situations may be ‘too expensive.’

Factoring almost never a good fit for businesses that have extremely low margins; factoring simply cuts into too much of the profits. If you are factoring at 3% and your margin is 12%, your profits are cut by 25%. This means you will have to raise your sales dramatically just to break even. In this situation, spot factoring might be useful when cash gets tight but a full on factoring arrangement will prove to be too expensive.

Factoring is also not a good fit for businesses that have declining sales. If the ship is sinking factoring will not help for long. However, factoring can work for companies that are restructuring and just need a short term cash flow solution in order to successfully change directions.

To answer the question posed by this blog post, ‘expensive’ is a relative term; factoring is expensive compared to what alternative? If the alternative is not factoring, there are examples above that outline when factoring is profitable and when it is costly. If the alternative is other forms of financing then only the alternatives that a business can actually qualify for should be considered. The point being, labeling factoring as “too expensive” in all situations is too simplistic. Factoring is a financial tool, and as with all tools, they are useful in some situations more than others. Not fully understanding when factoring is beneficial can cost your business dearly.

Factoring: Too expensive? is a post from: Factor Direct Capital