Wow … I can’t believe that 2012 has almost come and gone. The thing that has stood out the most to me from a business perspective is how many companies continue to seek out small business funding. While it seems there’s some economic recovery, the one thing I can tell you is that banks are still holding a tight rein on small business funding. 

Let’s face it, unforeseen things happen. A piece of machinery breaks down, an abnormally large order comes in, or another unexpected expense arises that eats away at cash reserves. Combine that with some of your customers that pay in 30, 60 or 90 days, and the result is cramped cash flow, causing the inability to meet payroll, keep vendors current, and meet other debt obligations.

Slow or non-existent cash flow presents a difficult situation to the small business owner. Even companies with well-defined, consistent operating cycles, well-managed expenses and black in their balance sheets have difficulty getting bank financing. 

Small Business Factoring

If you are a business owner thinking, “You know, while I run a tight ship, it probably wouldn’t hurt to have a backup plan,” then consider this. One of the best backup plans for a small business owner is to set your company up with small business financing, such as a small business factoring line.

Simply put, factoring is a form of receivables financing where accounts receivables of creditworthy customers are sold to a third party, known as a factor, at a set advance rate (typically 80%). By setting up a factoring facility, you help your business free up cash flow allowing your business to do the following:

• Purchase inventory
• Meet payroll
• Keep your payables current
• Not have to depend on your customers to always pay on time

Some Tips on Handling Business Funding

Now that we’ve established what factoring is and how it benefits you, here are some tips that help you efficiently manage your small business’ line of credit:

• The first tip is to try to factor all of your receivables. I say try, because only creditworthy receivables are factored. Factoring is fee-based, but the fees are a small price to pay to have the cash on hand necessary to conduct your day-to-day operations, and the peace of mind that comes with it. 

• Second, make sure all of your customer’s contact information is current. Having this data available helps the factoring company to perform their due diligence process, which includes invoice verifications. 

• Third, if you offer quick pay discounts, then you may want to either stop offering quick pay discounts or minimize them. By factoring receivables, you’re getting your hands on the cash you need and no longer need to offer the discount as an incentive. I recommend this because I have seen customers take the discount even when they don’t pay in the required time frame.  

• Fourth, there may be certain times when you need a little help with your cash flow. Look at factoring only select receivables. Particularly, consider receivables from your more creditworthy customers. There’s a chance the more creditworthy customer pays faster. That’s fine, because in the long run you are minimizing your factoring charges while meeting your cash needs.

Cash flow is necessary to maintain the health of your company. Even if you run the most efficient business, having a backup plan such as a factoring line works for your business growth.

Fast A/R Funding specializes in helping small businesses bridge the cash flow gap with factoring. Download our informative “Factoring 101” guide, or call 888.833.2286 to speak with one of our small business finance consultants.