Quite often a company seeking to get to the next level finds themselves in need of extra funds. There is a special project which needs to be funded or maybe it is just to strictly fund growth. Typically a company will complete a plan, review their current working cash and identify the short fall. Then they will go out and try and secure financing for the entire shortfall. The plan may identify cost such as; marketing, equipment, hiring more staff, increasing inventory or whatever else the business need maybe. They roll up the costs and suddenly they need $250,000 worth of funding, $150,000 in new equipment and $100,000 in working capital. This is what it will take to get their company to the next level. Now comes the issue. Your company may not be able to qualify for that much funding. So what do you do? Go back to the plan and place equipment as a separate item for financing. Take a good look at leasing the $150,000 worth of equipment. The lease will not show up as a debt but rather as an overhead expense. Plus leasing has options for A, B and C level credit. Now your company is only seeking $100,000 for funding of working capital. Seeking a smaller amount of funding may be much more manageable then the original amount. Of course the numbers are all relative but the practice of breaking out and seeking different levels of financing can be a very effective way of getting your business to the next level.
The number one reason that businesses fail is due to insufficient capital (they run out of cash). According to Bloomberg 8 out of 10 business owners fail within the first 18 months. Another 50% fail in the first 5 years. Other reasons businesses fail include; lack of experience, bad location, entering over saturated markets, over investment in fixed assets, unexpected growth and poor credit arrangements. Let’s add one more to the list; not knowing where to go to access working capital.
Most businesses owners invest their own personal money to keep the business going. Some will go to friends and families. Some will try the bank. But if you don’t have a lot of assets to pledge, a proven track record, a good credit rating or are not yet profitable, the chances are the bank is going to turn you down. So where do you go to get a loan to take your businesses to the next level?
There are private companies that will provide a loan to a business that has daily cash flow, as long as some basic requirements are met. A business owner does not have to pledge assets or have a great credit rating. There are viable financing alternatives, to receive business funding that are not considered loans. Business funding programs do exist where you are not required to pledge assets, have great credit or a long proven track record. A word of caution, do not expect to get the same rates you would get from a bank. These private lenders are taking on more risk than a bank, so a higher return on their investment is expected. Some of the available business financing options include, a Merchant Cash Advance, a Small Business Loan, Purchase Order Financing, Invoice Factoring and Supply Chain Financing.
Merchant Cash Advance
If your business accepts credit cards and debit cards there is a program called a Merchant Cash Advance that has very high approval rates. A business owner does not have to sign personally or have good credit. A Merchant Cash Advance is not a loan but rather a purchase of your future credit card / debit card receipts. The advancer will buy a future amount of credit card receipts / debit card receipts at a discounted rate. A small portion of a businesses daily sales will be taken by the advancer until the amount is re-paid. Typical payback is 6 to 10 months.
Small Business Loan
There is a small business loan available for business owners. The lender is more concerned about a company’s daily cash flow then about credit ratings and the ability to pledge assets. The business owner does not have to sign personally. This small business loan has very high approval rates, with some basic requirements for funding. The lender will take a small fixed amount of daily sales until the loan is repaid. The term of the loan is one year.
Purchase Order Financing
Has your business been working on landing a large contract? Congratulations you just received that long awaited purchase order. As you admire your new conquest you see some small print with the words Net 30, 45 or 60. Your business may have a cash flow issue. Vendors and payroll may have to be paid before you receive payment from your customer. If your business does not have enough available working capital or access to working capital to wait to get paid before you have pay your vendors and staff then what do you do? If your purchase order is from a reputable company then your business may be able to receive a cash advance against that purchase order. The purchase order itself is a legal agreement to purchase a product or service from your company. A lender will know that the customer will pay as long as you fulfill your end of the contract and advance you enough money to ensure you meet your contractual obligations. A lender will be concerned with the customer’s ability to pay, and your ability to fulfill the contract. They will not be as concerned about a businesses credit rating or the pledging of additional assets.
A company can be profitable and still go out of business due to poor cash flows. What a profound statement. A cash flow gap can be created when a customer pays slower than a company has time to pay its employees and vendors. The company is waiting for customers to pay before it can pay its own expenses. This can be a very serious situation and cause a profitable company to go out of business. Fortunately there is an alternative financing solution called Factoring of Invoices.
Factoring invoices is a business financial transaction where by a business sells its accounts receivable (invoices) to a lender (factoring company) at a discount. For this type of business financing there are three parties involved. One is the company that provides the service or goods to the customer, two is the factoring company that will provide the company with an advance, and three is the end customer that received the goods or services. When the company provides goods or services to the end customer an invoice is created. That invoice is then purchased by a factoring company at a discount. The factoring company will advance the company a large portion of the value of that invoice. The end customer will then pay the factoring company directly the value of the entire invoice. When the end customer pays the invoice, the factoring company will send the remaining amount of the invoice minus a small fee to the company that factored the invoice. Consider the following scenario: A company completes a service or sells goods to an end customer that typically takes 30 days to pay. Almost immediately after the transaction happens a factoring company will advance the company a large portion of that invoice. The company now has most of its funds available, almost immediately, to pay it’s suppliers, complete payroll or what ever else they would like to do with the funds. Once the end customer pays the invoice the remaining amount is forwarded to the company minus a small fee. Factoring of invoices can help out tremendously with cash flows, especially if a company is in a growth period. Factoring companies are not as concerned about the companies credit rating as they are more concerned about the customers ability to pay.
Reverse Factoring or Supply Chain Financing
This method of business financing is much like invoice factoring. The difference is, traditional factoring is when a supplier chooses to factor the invoices to their customers but with reverse factoring or supply chain factoring, the customer initiates the factoring to help their suppliers to finance their receivables. Reverse Factoring or Supply Chain Financing can be an effective way to improve your cash flows. The benefit to both parties is that the company providing the goods or services can get the outstanding value of their invoices paid very quickly and the ordering company can delay the payment of the invoices, thus improving their cash flow position.
In business today, it is so important to be able to access working capital. Rest assured that there are business financing options available to you. Know your options.
That day you have been waiting for finally came. You received that large purchase order that you have been waiting for. It’s a time for celebration. As you review the purchase order there is some small print at the bottom that says something like “Net 45”. Suddenly the anxiety sets in. Your begin to realize you have a real cash flow problem. You do not have enough funds to buy all the inventory and pay the extra staff before you get paid by your customer. You go to the bank and ask for some help. Unfortunately they tell you that you have not been in business long enough, you are not profitable enough or your credit is damaged from getting your business off the ground. Now what? Well fortunately there is another type of business financing called Purchase Order Financing. There are specialized business lenders other than banks that lend to businesses. That purchase order you received is a legal obligation to purchase from your company. Specialized lenders that offer purchase order financing will “advance” you a percentage of the value of that purchase order. Enough to buy your materials, pay your staff, and get that large order out the door. You don’t have to go it alone, your business can access working capital!
A business can be profitable and still go under due to poor cash flows. What a profound statement. Even though your business is showing a profit it can be difficult to pay suppliers and make payroll on time. This difficulty is typically caused by a delay or fluctuation in revenues. Cash flow shortages are usually caused by slower paying customers, seasonal sales, or your company suddenly experiences growth.
When customers do not pay with cash on delivery (COD) a gap is created between the receiving of the revenues and the payment of expenses. Payroll, rent, utilities, suppliers etc. all need to be paid on time. Lets say in one month you sell $100K worth of product with a profit of $20K. The $80K in expenses needs to be paid right away but your customer does not pay for 30 days. This creates a gap in cash flows. You need to pay out $80K before you see the $100K in revenue. You are profitable but do not have the cash on hand to pay your bills. This is why profitable companies can still go under. When your company experiences growth this gap in cash becomes far more difficult to manage because your costs are increasing faster then the revenues coming in.
Good management and planning for this shortage in cash flow is vital to your company’s success. At a minimum, a one-year cash flow analysis needs to be completed and reviewed on a monthly basis. The gaps in cash flow must be identified with a plan to overcome these gaps. The ideal situation would be for a company to keep a cash reserve to draw against when a cash flow gap is created. Unfortunately this is not a viable option for many companies. Some businesses have the luxury of a generous line of credit with a bank to overcome these cash shortages. In today’s tough lending environment these generous line of credits are difficult to come by. Although this situation sounds grim there is another viable alternative called Accounts Receivable Funding.
Accounts Receivable Funding or Factoring is a type of financing that is tied directly to your accounts receivables. Qualifying for factoring is much easier than traditional bank financing. A bank will focus on your company’s financial history and cash flow while a factor will focus on the creditworthiness of your customers. This is because a factor ties financing directly to your accounts receivable or invoices. These invoices are a “promise to pay” from your customer. If you customer has good credit then a factor is happy to lend you money against it.
Factoring invoices is an excellent financial tool to help maintain proper cash flow in your organization. When you sell your product or service a factor will generally advance you in cash up to 95% of the value of the invoice. Now you have closed the cash flow gap and are able to meet payroll, pay expenses and pay suppliers on time. When your customer finally pays the invoice the remaining amount of the invoice will be forwarded to you minus a fee. As your organization grows, so does your funding.
There is a cost for this type of financing so you need to carefully weigh the reduction in profit to the benefit of being able to make your payments on time. You need to also include the benefit of the redirection of your time. Instead of trying to juggle customer payments with paying bills you can concentrate on running and growing your business.
If you are interested in pursuing this as an option for your company please complete the contact form.
When the bank turns down your request for a business loan, most business owners really don’t know where to turn. Fortunately there are other lenders, that are not banks, that lend to businesses. Many of these sources for business funding are much easier to get financing from then banks. The trick is on how to find these companies and what are they looking for. Existing businesses with good cash flow can find business funding.