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Getting the Cash Flow You Need to Grow Your Business

Author: Cole Harmonson, President and CEO of Far West Capital Date: May 19, 2014

Misconceptions and truths about factoring

Are you ready to grow your business, but something is getting in your way? Do you need to increase your cash flow in order to grow your business? Are you profitable, but banks still won’t loan you money? Have you been told by a lender that your business is too small and you haven’t been in business long enough to obtain a loan? Did you just land a huge customer, but their payment terms won’t allow you to make payroll, if you increase your staff? These are some of the obstacles entrepreneurs encounter. When bank loans, angel investing and venture capitalists are not viable options, factoring is a beneficial solution for your company. Factoring can have a big impact on your company, especially when your company continues to grow quickly, lands a big business opportunity, or faces an obstacle beyond its control.

Tackling Misconceptions

Entrepreneurs are usually hesitant and skeptical about factoring, and it is rightly so. Growing your business takes big risks, ones that could have positive or negative consequences. It takes entrepreneurs a great amount of time, effort, and faith to research resources to help their business and with a plethora of tasks to complete and things to keep in mind, entrepreneurs dismiss factoring companies because of quick misconceptions they hear. Some misconceptions include the following:

Misconception: To factor, I would have to give my company away.

Truth: Unlike equity financing options, factoring gives entrepreneurs more flexibility and more control. Factoring companies do not buy part of your company, tell you how to run your business or require a seat on your board of directors. You own and run your company. A factoring company provides you the finances to do it.

Misconception: Factoring is a complicated process.

Truth: Anything can be complicated if you make it. When the process is explained step by step, it is easier to understand. A factoring company should discuss your company history and its progress with you. The factoring company should also analyze your company’s options and decide if factoring will actually give you additional profits. If factoring is a fit, paperwork is filled out and collected. Typically, the process from the first conversation to funding can take anywhere from a week to three weeks, depending on the speed of gathering your documents. After you receive the funding and depending on the type of factoring, your clients make payments to the factoring company.

Misconception: Factoring costs too much.

Truth: Factoring should be a customized solution for each company. That said, there is not a set rate. Some factoring deals can come close to bank rates and some factoring deals can have zero fees. In other words, sometimes we charge interest only. The cost depends on the factoring deal. In general, factoring does cost more than the typical bank loan but is designed to increase your profitability. If it does not increase your profitability, a factoring company should not sign you up.

Misconception: Factoring companies will disrupt my relationship with my clients.

Truth: Again, factoring should be a customized solution for each company, so the relationship between factoring company and the company’s clients will vary. Depending on the factoring deal, the factoring company may have direct contact with clients. In other situations, the factoring company may have no contact with clients. The point is, a factoring company’s job is to help you get more business, not disrupt your success. Factoring companies should work hard to customize the treatment of your valuable customers one at a time.

The best way to learn about factoring misconceptions is to take the time to talk to a knowledgeable factoring company. Learn about your financing options fully before you make a decision.

Your Financing Options

When it comes to your financing options, factoring companies have a couple of options to help your company grow. These include accounts receivable financing, asset-based lending and purchase order financing.

Accounts Receivable Financing

This type of financing allows a company to sell its outstanding invoices or receivables to a factoring company in exchange for working capital for the business. After a period of time, the company pays the amount of the outstanding invoices to the factoring company. This process helps increase cash flow.

For example, take the instance of one of our clients. Our client was in a great position. Her company had recently landed a new, nationally known customer. She added employees to accommodate the new customer and her company was growing successfully. Then, her customer changed the vendor payment policy, which altered the pay cycle. Our client now needed more cash flow to accommodate the new pay cycle and it gave her literally days to find a way to pay her employees on time. Her bank was not able to provide a financing solution. She was also on a deadline to make payroll in three days! By factoring her accounts receivables to a factoring company, our client was able to receive working capital in time, solving the payroll obstacle and being able to fulfill the company’s duties to her customer. Since then, she has worked with us multiple times to finance her company. Today, the company continues to be incredibly successful.

Asset–Based Lending

This type of lending is different from factoring in that your business does not present invoices one by one for funding, you present your entire pool of short term assets, including accounts and inventory.  This type of lending can be viewed as a step between factoring and bank lending and is meant for a company with an established track record but that is not quite in a place where traditional lending satisfies their need for capital.

Purchase Order or Inventory Financing

Purchase order and inventory financing is usually not a stand-alone financing option. When companies have a solid purchase order to fulfill but do not have immediate cash flow to pay its suppliers, this type of financing provides companies with working capital to pay its suppliers to fulfill the order.

When our long-standing client approached us with their plans for developing a new model of their rugged tablet PC, we looked at their past products and order history to analyze the anticipated demand when the new product would be produced and placed on the market. We were able to provide our client with the funding it needed to manufacture the tablet PCs and meet the demand of its purchase orders. This allowed the company the cash flow and flexibility it needed to grow its business.

What You Deserve

You deserve to grow your business, and you can! There are dedicated and qualified financing companies that will take the time to teach you about your financing options, give you a customized solution and help you reach your business goals. When you are researching factoring companies, be sure to look for the following:

1. Find an experienced and qualified team who has been in your shoes as an entrepreneur and who knows the ins and outs of factoring and financing options. The company should be focused on your goals, able to answer all your questions and helpful in easing away your reservations about factoring. The factoring company should also make sure factoring is the best option for you and your company’s future.

2. Find a company with excellent customer service. You deserve courtesy regardless of the size of your nest and to be treated the way you want to be treated. You deserve to talk to an actual person who will give you the time you need when you call.  You are paying a premium for financing, so you should feel good about the way in which you are treated.

3. Find a company that is in tune with your business goals and dedicated to helping you reach those goals. When growing your company is your goal, you need a factoring company who is ready and enthusiastic about helping you do it.  We also recognize that you need more than just capital to succeed.  A factoring company’s connections in business become your resources for success.

Don’t let any obstacle keep you from reaching your goals or growing your business. There are factoring companies that will make sure what they offer is a fit for what your company needs and not just another factoring deal.

Content provided by the Commercial Finance Association (CFA). Its website, BizCapNet, helps businesses connect with asset-based lenders and factors. It is free, fast and easy.

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