If you own a small business or want to start one, you might have trouble getting started because competition is tough. One way that smaller b2b businesses compete is by offering great credit terms to their customers such as net-30, net-60, and beyond. Small businesses need to accept the terms in order to maintain large accounts and clients.
For a small business to wait more than 90 days to receive a payment causes cash flow problems. Many small businesses struggle to make payroll or pay for expenses while waiting on net-90 invoices. Although building the business is important, cash flow is important too. There can be a negative impact on your cash flow when your customers seek extended payment terms.
Although building the business is important, cash flow is too. When your customers seek extended payment terms, the result can have a negative impact on your cash flow. Your business has immediate expenses because of a sale but you will not see payment from that sale for a while.
The Impact of Cash Flow
Cash flow is different than profit because a business can be profitable while having negative cash flow. The number one reason why many businesses fail is because they have poor financial management. The biggest mistake a small business owner can make is not pay attention to the cash flow. Cash flow management is critical to success of any startup or small business.
Fast Financing Options
Keeping a positive cash flow can be difficult based on the patterns of your business. You should have a plan to check your cash flow continually, but also to make adjustments when things go wrong because they will.
Invoice Financing or Factoring
Invoice financing or factoring is one option that can help. There are many types of factoring companies and each one offers a slightly different product. Invoice factoring is a way to use your unpaid invoices as collateral to get cash quickly through a loan. A factoring company will provide a percentage of your accounts receivable up front, almost right after an invoice has been issued.
When the invoice is paid by the customer, the lender pays you the balance of the invoice, less any interest and fees. For the cost of the interest and fees, you get the cash you need, when you need it so that your cash flow will remain positive.
On the other hand, invoice discounting is a type of invoice financing in which you sell your accounts receive to a third-party lender. The lender takes on responsibility for the accounts receivable and collect on any invoices due. You receive a percentage of the total invoice up front.
Due to this type of arrangement being an outright sale of the receivable, the fees are generally a bit higher.
Unexpected expenses or increase overhead can easily cause a small business to have cash flow problems, even if you are good at maintaining a positive cash flow in your business. Spot factoring is a specific option that many businesses keep in their back pocket for just that type of rainy day.
It provides a flexible safety net for all types of small businesses. Instead of financing outright all or most of your accounts receivable, you can establish a relationship with a lender for spot factoring, also called single invoice factoring. This type of financing can be used in a cash flow crisis.
The Pros of Spot Factoring
Similar to a home equity line of credit, spot factoring allows you to establish an account that you can draw on based on a single invoice when needed. Fees, interest, and percentages are established with the lender and you can use this to get the cash you need immediately.
The fees for spot factoring are normally higher than other types of invoice financing. Some lenders also require you to have a certain amount of activity on the account.
The advantage of spot factoring is that you do not have to sell your entire book of accounts receivable at one time. You maintain the flexibility to use the financing depending on the cash flow situation.
The Bottom Line
Careful planning and monitoring of the cash flow situation is critical to the success of any business. It might be difficult for small businesses to wait for their invoices to be paid and sometimes you might need to get financing to maintain a positive cash flow.
Invoice factoring and spot factoring are two options that will provide an immediate cash flow based on your accounts receivable so if you are worried about an impending cash flow crisis these are the options you want to consider.