Corporations today hold a higher share of cash and liquid assets on their balance sheets -- $2 trillion – than at any time in nearly fifty years (source: Wall St. Journal, 9/7/11). Of course, many smaller businesses are also trying to keep a cash cushion, as the economy continues to stumble and government debt roars ever higher.
Unfortunately, most small and medium-size businesses don’t have the luxury of being cash-rich, as they wait for their customers to pay their invoices on a timely basis. These companies may be profitable on paper yet struggle to maintain adequate cash flow in order to meet payroll, order inventory, and pay all of their other regular bills. For cash-strapped businesses that are not publicly held, there are basically three options for becoming more liquid:
1) Obtain a working capital loan from a financial institution
2) Arrange for short-term loans from personal funds or from family and friends
3) Factoring of accounts receivable
The first two are cheaper and more suitable for companies with steady and predictable income. Banks salivate over high-caliber companies that just occasionally need short-term financing.
For companies that either do not want bank financing or would have trouble obtaining it, factoring is a viable solution. The premise of factoring is simple. Once you are set up with a factoring company, the factor fronts you 75-85% of the amount that you invoiced out to your customers within 24-48 hours -- no more waiting for your customers to pay you 30 or 60 days later. When the customer does finally pay, you receive the remaining amount owed less a small fee to the factoring company.
The advantages of factoring include the flexibility to only factor how much you need (as long as it is at least $20,000 per month), no minimum contract term, and the funding decision is based on the creditworthiness of your customers rather than that of your own business. Staffing companies, manufacturers, distributors, and service companies are some of the ideal candidates. Factoring can be used by nearly all commercial companies, as well as those in the health-care field.
To get started, a factoring company generally needs a completed profile worksheet, a report showing the accounts receivable aging, and a copy of a current invoice with backup documents from you. Normally, a business can be set up to enjoy factoring in less than two weeks.
Factoring is not for everyone, but most companies can use it to stabilize their income streams and grow their businesses to the next level. Especially in this type of unpredictable economy, factoring may be exactly the right choice for you.
Article courtesy of Alan Noblitt of Seaside Capital Inc. To learn more about Seaside Capital, visit their website.