Managing the finances of a seasonal business is challenging. Certain expenses invariably decrease when business slows; however,
fixed expenses such as office space, salaried employees, insurance and others remain the same no matter how slow the off-season
may be.
If you plan well during the busy season, you store up enough cash to keep the business running smoothly in the off-season; however, if reality doesn’t align with your plans, you could very well be up a creek with no paddle.
Using Cash Flow Financing For Consistent Cash Flow
Cash flow financing provides a way to keep your bank account stable when revenues are down. There are a number of products in the world of commercial finance that are specifically designed to help you maintain consistent cash flow.
Commercial Line Of Credit
A line of credit covers a wide array of financial products with a similar goal -- to provide the ability to borrow funds on a short-term basis to meet immediate cash needs.
This is sometimes referred to as a working capital loan since the proceeds are typically used for general working capital. The funds go to:
- Pay employees
- Cover marketing and new business development
- Pay rent, insurance, utilities and other monthly expenses
- Pay vendors
- Take care of practically any monthly expense your business has
In general, these types of loans are not used for large purchases such as equipment or real estate, since they are designed to be repaid relatively quickly.
Factoring 101
A subset of cash flow financing is factoring. It’s used in the same manner as a general line of credit; however availability is tied directly to specific invoices on your books.
Factoring allows you to assign your receivables to a factoring company. This finance company advances funds based on the dollar amount of an invoice. When the invoice comes due, your customer pays the factor (since the invoice was assigned to them) and the factor sends you the balance of the payment minus their fee.
How Factoring Helps Your Cash Flow
The idea of cash flow financing is to get you cash quicker than what you would without outside financing.
The Cash Flow Cycle
Cash is a function of sales, right? Sales, though, is a multi-step process. You receive an order, then provide a product or service, then invoice and then collect payment. Depending on your business the time between receiving an order and collecting payment is weeks or even months.
When business is slow in the off-season, cash gets tighter. Every dollar counts. When there isn’t any excess margin, you have to stretch your own payables waiting for a payment to come in. Perhaps you’ve planned for this and have your expenses in sync with anticipated customer payments, but what happens if a customer ends up taking longer than usual to pay an invoice?
Cash flow financing takes the guesswork out of the timing of cash inflows and outflows. You know that you get cash as soon as you invoice. That makes all the difference in the world when cash is tight. It takes the biggest question mark out of the cash flow cycle.
Factoring Keeps It Simple
With factoring, each advance is tied to an invoice. This makes the process very simple. You know when you invoice for $10,000, you receive 80% of the invoice as soon as you submit it to the factoring company.
You don’t have to worry about providing fancy reporting to the bank. You don’t have to worry about restrictive loan covenants. You simply invoice then receive cash.
As a business owner, your mind is being pulled in a multitude of directions. You need a simple solution to streamline the cash flow of your business in the off-season. Factoring is as simple as it gets when it comes to cash flow financing. It gives you the support you need in the off-season without all the hassle.
Find out the inside secrets to selecting the right factoring company by downloading our tip sheet below. If you’re ready to get started with a factoring program today, call 888.833.2286 to speak with one of our Cash Flow Consultants.
