Revive Your Business Cash Flow With Accounts-Receivable Financing

By Jeff Bell

Good business and good cash flow are not necessarily the same thing. Just ask any business owner with payroll and operating expenses who regularly loses sleep wondering if customer payments will come in as needed, on time, every time.

Lack of working capital is a number one business fear, keeping small businesses small and challenging entrepreneurs to find new ways to fund innovation. But savvy business operators are bypassing this roadblock—and generating steady cash flow—by factoring their receivables.

Factoring for cash flow

Invoice or accounts receivable (A/R) factoring has emerged as a straightforward solution to provide businesses with consistent cash flow. It is a financial transaction where a business sells its accounts receivables (or invoices) at a discount to a factoring company (or factor), enabling the business to gain immediate access to its cash.

For example, let's say your company is cash strapped. How will you handle that record-breaking order that finally comes in? Services and raw materials must be purchased to complete the order, causing a very real problem if your firm doesn't have the cash on hand. The client may agree to pay a deposit, but the order might be lost if your firm is too small to handle the business in the meantime.

And let’s assume the new customer is a biggie—of course they are going to pay, but they may have their own payment process where comparatively smaller vendors must ride out long payment terms in order to win the business.

A business loan could come to the rescue, but for a number of reasons that could be as unlikely as winning the lottery, and it requires a lot more effort. In addition, a lengthy application process and stringent credit review are big hurdles to overcome. And besides, maybe you just really need cash flow more than you need a costly loan or credit line that will add long-term debt to your company’s balance sheet.

With invoice-based financing, the factor will advance a large percentage of the invoice value to your business. Upon getting paid by the end customer, the factor pays the remaining balance minus agreed-upon fees. Your business gets paid quickly, and the factor takes on the role of the accounts-receivable department—easing the administrative load and leaving you to focus on the job itself.

Businesses can factor some or all of their customers; most importantly, the availability of cash remains in step with new contracts and customers, enabling an expanding business to handle the increased operating expenses associated with growth.

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Factoring becomes mainstream

Many years after the start of factoring, and even with billions funded, why has factoring remained relatively untapped as a finance option? Used historically by struggling businesses during tough economic times, getting paid in advance became negatively associated with firms on the edge of failure. This perception has kept factoring as a less favored financial option, but that has changed dramatically along with the economic climate, fueling a new look at the factoring process.

Business lending rules are far more complex and demanding, competition is fierce, and growth is required for survival. Together these challenges mean that working capital is a necessity, and ensuring access to smooth cash flow is recognized as smart business.

Cash flow as a strategic advantage

Understanding and managing cash flow is critical for any business. All viable methods should be evaluated for each unique business case, and should include factoring as a mainstream option. Invoice-based financing is playing a renewed and important role in modern business finance, helping manage operating costs, and ensuring that business growth is no longer dependent on how much operating capital is reserved to winning new customers.

What can a business do with better cash flow? Make payroll, buy equipment, operate smoothly, and compete effectively all come to mind. Anyone who runs a business knows these are monumental achievements, a lot like climbing Mount Everest daily. It’s no easy feat, made more complex by operating expenses that remain consistent even as receivables make their way through extended payment processes that may vary significantly from client to client.

Good business and good cash flow are two different things. Working capital has become a top priority for smart business—enabling growth, smooth operations, and reducing the fear that so many business owners face.

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