This guest post was written by Andrew Cravenho.
On the mountain of challenges faced by small businesses, cash flow is frequently at the summit.
There Are Methods Available that Can Bring in the Cash
- Launch a vigorous sales campaign.
- If your business sells products rather than services, you can liquidate inventory through discount re-sellers, liquidators, etc.
- Conduct a blow-out sale offering deep discounts and hope that customers will also buy your more profitable items.
While these strategies may bring much needed cash to your business, such methods ultimately have a negative impact on your bottom line and can affect the profitably of your business far into the future.
Many entrepreneurs, start-ups, and established small businesses are unable to secure financing for working capital and are increasingly forced to rely on accounts receivable as the primary source of cash flow.
If your business is facing this challenge, there is a way to meet it without implementing the slash and burn strategies outlined above. Using this method may actually lead to increased operating efficiencies.
You Can’t Spend Your Accounts Receivable
That is, until the invoices are paid. Converting paper invoices into paper bearing pictures of dead Presidents is the best way to achieve the cash flow you need. Many small business owners are weak in this important area. The reluctance to press for payment may be the result of:
- concerns that the business will lose customers
- inadequate procedures for monitoring receivables
- having no policies and procedures in place to encourage prompt or early payment
- reluctance to hire collection staff or to repurpose existing staff to the task
Quite often, slow payment is as much the fault of the business owner as the customer.
What You Can Do
Use your receivables to finance ongoing business operations. This is known as factoring and—although it is not free—it is not difficult to do a quick cost versus benefit analysis. Factoring is not a loan. Consequently, the financial strength of your enterprise is not the focus. The focus is the credit worthiness of your customers.
How it Works
Factoring companies purchase your unpaid invoices for cash, creating an advance—not a loan. This is a plus for your company’s balance sheet and could help you secure a line of credit with a bank at some point in the future. Let’s walk through the basics.
As a master of the obvious, I can tell you that step one is finding a factoring company. You can enlist the services of a company such as CBAC Funding. They, and other similar companies, specialize in matching businesses with invoices to sell with companies that want to buy them.
Once you have selected a factoring company to work with, you still have options. There are two forms of factoring.
- Recourse factoring, which holds your business liable for invoices that remain unpaid
- Non-recourse factoring, which absolves your business of all risk and absorbs any losses incurred. This is the most costly approach for your business
- In each of the above options, the factoring firm will notify your customers of the change. If you have reservations about relinquishing control of your billing practices to a third party you have the option of invoice discounting.
- Invoice discounting allows your business to retain its billing practices and is transparent to your customers. Your business still receives immediate cash but at a lower percentage than the recourse or non-recourse options—typically 70 to 90 percent of the face value of the invoice.
Factoring can be an excellent tool to bring cash into your business. Ancillary benefits may include opportunities for staff reduction, improved credit standing, and peace of mind. You can’t put a price on the latter!
Andrew Cravenho is the CEO of CBAC LLC, an innovative invoice financing exchange. As a serial entrepreneur, Andrew focuses on helping both small and medium sized businesses take control of their cash flow. Prior to CBAC, Andrew founded an annuity financing company relieving tort victims of financial hardship.