Working with a commercial finance company to fund your business helps you solve problems and provides you with the cash flow needed to seek out new growth opportunities.
When looking for funding for your business you typically have two options -- a term loan for equipment or some other fixed asset or a cash flow loan obtained by financing receivables.
Getting a loan to improve cash flow isn’t a magic bullet. There are a few key things that you should know before you consider financing your business.
Plan Cash Needs In Advance
There’s an old saying -- “If you fail to plan, then you plan to fail.”
Many of the issues that cause businesses to go bust aren’t insurmountable. You just need enough time to deal with the problem. Being in commercial finance for a number of years, we’ve seen companies succeed and fail. In almost every case, the distinction between the two was the management’s ability to plan ahead.
The more diligent you are in planning your cash needs in advance, the more equipped you are to deal with problems when they arise.
Plan for expected expenses such as payroll, but also plan for unexpected events such as equipment breakdowns and uncollectable receivables. Unexpected events are no longer unexpected when you prepare in advance.
Evaluate Cost Of Funds In Light Of Their Economic Benefit
When you request funds from your lender, you should already have a plan in place for each dollar before the money hits your account. It doesn’t matter how low the interest rate is, you’re wasting money if those funds just sit in your bank account.
Likewise, don’t shy away from borrowing as much as possible if the economic benefit of those funds is greater than their cost. This should be done within reason, of course. Taking on more debt than your business is able to support creates a whole new set of problems.
Quick-pay discounts from vendors are a good example of cost of funds verses the benefit. If your vendor offers, say, a 2% discount for paying within 10 days rather than net 30, then as long as your cost of funds is less than 36.5% on an annual basis, you save money by borrowing to pay your vendor early.
This rule holds true when using the funds to bring on additional employees, generate new business or buy inventory in bulk at a discount.
Communication Is Key
When you work with a commercial finance company, the lender becomes your partner in business. They don’t want your business to fail any more than you do. When issues arise, they have a vested interest in making sure problems are resolved.
The better you communicate potential issues to your lender, the better they are able to help you address them. Need to make payroll on Friday and don’t have the funds? Let you lender know. They may be able to provide an advance.
This goes hand in hand with planning your cash needs in advance. Most receivables financing companies are willing to work through problems with you, but need as much lead time as is possible. This is especially true when the accommodation requires a modification to your loan agreement.
Getting a debt facility in place is a huge benefit to your company, but you need to make sure you have a plan in place in advance along with an open relationship with your lender in order to truly succeed.
Fast A/R Funding specializes in helping small businesses bridge the cash flow gap with factoring. Schedule a demo below, or call 888.833.2286 to speak with one of our small business finance consultants.
