82% of all small business failures come as a result of poor cash flow management, a misunderstanding of cash flow, or simply the amount of time it takes to transform goods and services into receivables. This is where a non-traditional financing option can help.
Many businesses, in many industries suffer from these cash flow crunches. Thematically, they tend to be either new startups, have a small number of dedicated customers responsible for the majority of their receivables, or they encounter net 30,45,90+ day payment terms.
What kinds of options are there if your business falls into one of these hypotheticals? You can ask yourself; how can I secure payment faster, how can I cut costs in the short run to maximize the power of my limited cash? Oftentimes, cash flow crunches mean saying “no” to customers, it means cutting production, it means limiting sales, all this while you’re waiting for the receivables to come in for work already done. This is crippling, and for 82% of small business venture failures this spells DEATH.
Without cutting production, without laying off employees, without saying no to new customers, what options exist to secure the cash necessary to cover day to day expenses and maintain an upward growth trajectory for your business?
Non-Traditional Financing Option: Factoring
Factoring could very well be the ticket to securing funding and ensuring your business can withstand the set of all possible cash flow crunches.
Factoring is a non-traditional financing option. It’s easier to explain Factoring by comparing it to traditional modes of funding such as loans, or investment capital. With loans comes the taking on of debt, which accrues interest over time. Venture capital, or other forms of investment capital are both rare and come with the added cost of giving up ownership stake in your business.
Factoring is different in that there are no payment terms, no interest rates, and no ownership stake at risk. Rather, Factoring takes advantage of the very receivables your business is waiting on to provide you the cash flow you need either same day, or the next.
As a Factor, once an agreement has been reached with our prospective client, an underwriting period where the validity of our client’s customers is ensured, and a document called a Notice of Assignment is sent to your customers, the Factor will then purchase your net 30,45,60,90 day invoices, and either wire, or ACH you the funds you need the same day, or the next.
Need Cash Up Front?
The Notice of Assignment, like the name implies, assigns payment from our client’s customer to the Factor, because once the Factor funds the client, it now owns those Invoices being purchased. Once, the relationship between our client and our client’s customer is established, it is at this point that the Factor “Advances” a percentage of the purchased invoices.
If you are waiting on payment for $1000 worth of Invoices, and the Discount Rate negotiated with the Factor is 5%, the Factor is essentially purchasing 95% of the purchased Invoices. In most cases, the same day the invoice is presented to the Factor the client receives their funding. The Factor in turn incurs the long payment periods from our client’s customers that would ultimately strangle our client’s business. With this financing option, your business gets operating cash quickly.
It’s worth noting that the credit worthiness and validity of our client’s customers is more important than the credit worthiness of Factor’s client. This makes Factoring a great option for startups, newly founded businesses, businesses in which the owner’s credit is not the best.
Any industry where contract work is common, long pay periods for goods and services rendered is the usual; Industries like staffing, import/export, trucking and logistics, floral, food and beverage, sub-contracting – any industry where county/state/government contracts are commonplace, all these industries are uniquely suited to Factoring.
Want to Know More?
Does Factoring sound like a fit for your cash-starved business? Contact us at AA Bankers, schedules@aabankers.com or call 786.681.0737 for more detailed rates and offerings.