Cash Flow Management: How Invoice Factoring Can Strengthen Your Business for Growth

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The economic challenges of recent years have left a hangover of debt for many firms. Even in today's slow growth economy, the cards are still stacked against many small firms. With an impaired balance sheet as a result of your equity being eaten away by tighter operating margins, rising cost of materials and labor, and the inability to pass on the additional costs means that bank financing is almost impossible to get. If you are lucky enough to have a bank line, the terms and conditions may have changed as new regulations have the potential to shift the profile for your relationship with the bank from a strong personal relationship into a loan that is categorized as ‘risky,’ thereby requiring the bank to increase its capital requirements. The ability to find and obtain needed financing to strengthen and grow businesses remains a true challenge. Cash flow management can either make or break a small business. Without the proper cash flow management, you will never be in a position to grow your balance sheet and change the lending profile of your company from the bank’s perspective.

The demands within the construction industry seem to be constantly working against you. As more contractors and subcontractors bid on a smaller offering of jobs, to remain competitive, you must offer extended payment terms and earn less on the jobs that you successfully bid. Meanwhile, as the business owner, you must ensure you have the cash flow to make payroll, pay benefits, manage and collect accounts receivable, manage and pay suppliers, and find work to backlog. These demands create an almost perpetual cycle of cash flow deficiency for your business. To add insult to injury, a natural disaster such as Superstorm Sandy can create a sharp increase in work, and because of your constrained cash flow, you must pass on opportunities to increase your work load and backlog. Opportunities such as Superstorm Sandy become a double-edged sword in an industry where payment can take up to 90 days or more from completion of the work.

Stretched Cash = Business Risk

Firms across the nation face similar conditions each day in their own businesses. Let’s take a look at Marc; Marc owns and operates a successful electrical firm supplying services to the City of New York, the Board of Education, and Mass Transit, to name a few clients. Working within the industry standard practice of 90+ day payment terms was challenging enough. Then, Superstorm Sandy hit.

The demand for his company’s services dramatically increased and an immediate expansion of subs and contract workers was needed. The delay in collecting accounts receivable, as a result of extended payment terms needed to gain the highly competitive business, was forcing the company to miss payroll and delay payment to its own suppliers, the life blood of the business. The residual impact of stretching inadequate cash flow leads to neglected bidding capacity. The company’s backlog of work was reduced from the typical six to 12 weeks to just two weeks.

Realizing that stretching existing cash flow was no longer an option, the company approached local banks for financing help. Each one turned down the company’s loan applications but referred the company to alternative financing firms. Even those firms turned down the contractor due to strict credit conditions, balance sheet issues, and the existence of debt hangover and the company’s inability to meet other loan covenants.

Taking Control & Keep Up with Factoring

There are a multitude of companies that provide invoice factoring or spot factoring to small businesses. This is an effective strategy to help companies obtain the funding they need when traditional sources, such as banks and finance companies, are not available or willing to help. This invoice factoring strategy refers to the sale of only that portion of a company’s accounts receivable needed to meet its cash flow needs. In other words, the company sells its outstanding invoices for services the company has