In my almost seven years in the commercial finance industry, I have seen the benefits of cash flow financing:

• Cash flow is stabilized.
• Vendors are kept current.
• You’re able to make payroll without breaking a sweat.

If you’re a business owner that has a good handle on your business, and thinking to yourself that you have all of that going for you.  You should probably continue to read on, because you may think again about cash flow financing.

Even if you have a good relationship with your customer base, and they always pay like clockwork.  You never know when you’ll have that one large order that ends up taking a little longer to collect.  Then you’re left sitting with bills to pay, but no cash to do it with…….that’s where cash flow financing comes into play.

Cash Flow Financing…………………………

Cash flow financing in itself is a very broad term.  I want to break it down to one of its more common forms……………..factoring.

Factoring……to simply put it, is a form of short term cash flow financing where you sell your accounts receivable relating to credit worthy customers to a third party otherwise known as a factoring company.

Advance rates vary, but can be around 80%.  Once the invoice is paid, you then have the option of getting the remaining funds less any applicable fees.  Fees are based on how long the receivable is outstanding.

The Great Thing About Factoring…………………….

At the end of the day, the great thing about factoring is that, you bridge the gap between when an invoice is billed and the cash is collected.

You may have to work a little to plan out that cash flow, since you may have customers that pay in 30, 60, or even 90 days.

This extra work is definitely eliminated with factoring.  The cash is generated to conduct your day to day business.  You don’t have to sweat the small things:

• Planning which vendors to pay.
• Buying inventory.
• Paying your employees.
• Building your business and customer base.

Factoring Finance Strategies………..

Here are some simple and possibly cost effective strategies for factoring your receivables.

• Factor all of your receivables.  This might cost a little bit.  It is a small price to pay to have the cash necessary to conduct the most simple of day to day operations

• Are you a business owner that offers quick pay discounts?  If you are, then you may want to just stop altogether.  Factoring receivables gets the cash you need.  I have seen customers take the discount even if they are not paying in the required time frame. 

• There are just certain times only a little help is needed with cash flow.  Only factor some of your receivables relating to the most credit worthy customers.  There’s a chance the more credit worthy customers pay faster.  In the long run you’re minimizing your factoring charges while meeting your cash needs.  Keep in mind there are some company’s out there that may require all receivables to be factored.

How to Make a Factoring Program Efficient………………….

In addition, here are some things you can do though to make the process a little more efficient.

• Make sure all of your contact information at the customer is up to date.  This will help the factoring company.  Most factoring companies have an extensive due diligence process which includes invoice verifications.
• Provide the factor with collection status updates on aging receivables.
• Monitor your individual customer credit limits and provide your loan officer with updates on how business is going and if increases or decreases in credit limits are needed.  This will make planning your cash flow a lot easier as well.
• Utilize accounting software.  By doing so, your books and records will be much more organized.

Cash is King………………

Remember one important thing………..cash is king.  In order to successfully run a business you must have cash.  If you feel like things are running smoothly, still consider having a factoring line.  It’s a great level of security to have with your company to ensure your business continues to succeed.