My business was booming. New orders were flowing in and my profit margins were right on target.
So why was I standing at the mailbox on Thursday anxiously waiting for checks to cover my Friday payroll?
I was learning the awful truth about cash flow management. Cash, not profit, is the lifeblood of a business and if your business is growing, as mine was, a cash flow crisis can be right around the corner. Operating a small fabricating business in the late ’80s, my customer base was like gold: steel mills and manufacturers with financial strength that I could only dream about.
My invoices were like money in the bank. The problem was, it could be 60 to 90 days from the time I received a purchase order, filled the order and invoiced the job. Meanwhile, the cash monster never missed a meal.
I offered a payment discount to my customers of 2 percent for payment within 10 days and it helped, but it was not always taken and the mailbox was often empty. My accounts receivable file was full but I was starving for cash.
This scenario is not uncommon. For many small businesses in this position, their bank cannot help. I had a credit line and a term loan for my equipment but I was already deep into my credit line (which had to be cleared at the end of the year) and there was no collateral left for another term loan. I needed short-term money, and fast.
Unfortunately, I did not know that the solution to my dilemma was right at my fingertips: my accounts receivables. My invoices were valuable assets, due to the strength of my customers, but I did not know that I could turn them into instant cash. Today I know the solution is a simple one called factoring.
Factoring is a financial alternative whereby a business can sell its receivables (open invoices) to a factor at a discount. Discount rates generally range from 4 percent to 6 percent of the invoice amounts. That is a little more than I offered my customers in discounts, but when it comes to lifeblood cash, it is a small price to pay for relief.
The benefits of factoring are many:
- Gain immediate cash without consideration of your business’s credit rating;
- Increase your cash flow control (sell only the invoices you choose);
- Have no loan to repay (you are selling an asset, not taking out a loan);
- Avoid having to offer personal guarantees, tax returns or financial statements;
- Improve of your company credit rating (take discounts and make timely payments to suppliers);
- Meet tax and payroll obligations on time;
- Seize opportunities immediately;
- Reduce payables;
- Avoid giving up equity.
Factoring is not the solution to every cash flow problem, but because of the speed and ease of setting it up, it can be a financial alternative that keeps the blood flowing.
My fabricating business is just a memory now and a valuable Business 101 learning experience. Could factoring have saved my business? Possibly, but that was then, and I had a lot to learn.
If the cash flow monster is biting at your heels, maybe factoring is the alternative that can let you sleep at night.
Randy Linquist is a business finance consultant for UniSource Small Business Services in Canton, specializing in financing solutions for businesses of all kinds. He can be reached at (330) 452-4502 or by e-mail at [email protected]
