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Are your customers late payments causing you cash flow issues?
Is growth causing you to have difficulties with cash flows? Company enters growth mode: (example of cash flows without financing in place) Mth Sales Revenue Costs $Received from Customers Mthly Cash flow Assumes steady sales $80,000 $64,000 $80,000 $16,000 Customers pay 90 days but sales are steady $80,000 $64,000 $80,000 $16,000 $80,000 $64,000 $80,000 $16,000 Company Enters Growth 1 $100,000 $80,000 $80,000 $0 Costs are increasing faster than revenues coming in due to customers paying in 90 days. 2 $150,000 $120,000 $80,000 ($40,000) 3 $200,000 $160,000 $80,000 ($80,000) 4 $275,000 $220,000 $120,000 ($100,000) 5 $350,000 $280,000 $160,000 ($120,000) 6 $400,000 $320,000 $200,000 ($120,000) Company enters growth mode: Mth Sales Revenue Costs $Received from Customers Mthly Cash flow Steady sales $80,000 $64,000 $80,000 $16,000 Customers pay 90 days and sales are steady (assumes company has 3 mths revenues in bank) $80,000 $64,000 $80,000 $16,000 $80,000 $64,000 $80,000 $16,000 Company Enters Growth and begins to factor 1 $100,000 $80,000 $80,000 $2,000 Positive cash flows because company is factoring invoices and eliminating the waiting period.* 2 $150,000 $120,000 $80,000 $15,000 3 $200,000 $160,000 $80,000 $19,000 4 $275,000 $220,000 $120,000 $28,000 5 $350,000 $280,000 $160,000 $37,000 6 $400,000 $320,000 $200,000 $49,250 *Cost of factoring in this example is 3%with an 85% advance and is used for illustration purposes only. Which of the above situation would you want to be in? Obviously, supporting growth, making payroll and paying suppliers on time is the best situation.
Most small to medium sized companies that enter into a growth curve, will at one time or another, have difficulty in making payroll or with paying suppliers on time. It is normal for a company that provides services or goods to other businesses to have costs increase faster than the revenues coming in. The first reaction may be to try and obtain a small business loan from a traditional lender. Unfortunately 90% of these businesses can’t qualify for a small business loan from a traditional lender. If you are in this situation you may be asking yourself , "what do I do now"? At this point many businesses owners turn to personal investment or to investment from friends and family. This does not need to be the case. There are alternatives to traditional bank lending. Lets look at the following scenario.
A manufacturing company supplies widgets to four customers. Sales have been steady at $80,000 per month for quite some time. The company is profitable and bills are being paid on time. Their customers are paying 90 days after the widgets have been shipped and the company has adequate working capital to cover the slow receivables.
Now the company just invented a better widget and sales really start to take off. This is what every business owner hopes and dreams for. Every month the company is adding additional staff to keep up with the increasing demand. Here comes the issue. Customers are still paying every 90 days. Costs start to increase faster than money coming in. The company now has negative cash flow every month. This is when most companies will seek a bank loan and the majority will be denied. The following two examples reflect the exact same situation at the same company. The first example reflects the companies increasing revenues, increasing costs and the negative effect on the cash flows due to customers paying in 90 days. The second example reflects the same business situation, only the company decides to factor their invoices. Notice the difference in monthly cash flows.
(example of cash flows with factoring or line of credit in place)
A lot of business owners seem to think that factoring invoices is only for companies that are in financial difficulty. This is absolutely false. Factoring invoices is an extremely valuable financial tool that allows companies to manage cash flows and aids in growth. Factoring is widely used across many industries.
Unlike a small business loan, factoring is very simple to be approved for. Even if you have been turned down for a loan you may qualify for factoring because the invoice is your customers promise to pay. Approval depends on the credit worthiness of your customers. Factoring can be set up in 7 days and you can start receiving funds within 24 hrs of delivering your service or products. For a free no obligation offer on factoring please click on the contact request or contact us at (888) 600-6039.
See information on other small business loans or business financing programs.
