Cash Flow Finance

Financing Business Growth Cash Flow Finance

Over the past 10 years, I have worked with thousands of companies in trying to determine the best way to finance the growth of their companies. As a financial professional, I have sought to help businesses in almost every industry try to determine the best way to help them meet their cash flow goals and run their businesses more efficiently and more profitably.

Businesses that sell to other businesses and carry commercial accounts receivables typically have to deal with constraints on their cash flow. The usual reasons are growth, which drains cash; payroll and taxes, which need to be paid on a specific day regardless of the cash receipts; and slow paying customers. All of these create a strain on day to day basis.

To combat these issues, I have determined four main ways to finance cash flow and fuel growth without creating monetary constraints. Each business can benefit from one of the options listed and as always it is best to look at the cost versus the benefit of each solution.

The best and most cost effective way is to finance business growth with internal capital. The businesses that are able to do this typically are more established businesses that have good internal accounting controls and have a good profit margin that allows a large portion of the sales amount to be re-invested into growth and opportunity. Within this process is working closely with suppliers to allow additional time for the right opportunities to benefit both parties. Most suppliers are willing to work with their customers if good communication is established and there is benefit to both parties. The downside to this strategy is that without outside capital available, there are some good business opportunities that may be missed because the source of cash does not match up with the use of cash for a particular opportunity.

The second most cost effective way to finance business growth is with a conventional line of credit at a bank. Usually priced at or near the Prime Lending Rate, a line of credit is a cost effective way to have additional cash availability for short term borrowing needs. The credit requirements for a line of credit are usually high and the amount is usually based either on some form of collateral (real estate, accounts receivable, etc.) or on the personal credit score of the owner. If the facility is big enough to accommodate all of the needs of the business, it is a great tool to take advantage of growth, inventory needs and fluctuations in the business cash cycle. If the facility is not big enough, it can constrain business operations and actually prevent certain opportunities.

If the line of credit is either too small or it has too many restrictions, the third best option is a bank-based accounts receivable lending program. While these programs take many forms, the basic premise is that the bank will advance cash for an invoice on the day the bill is created. For a fixed discount fee, the companies can then get same day cash for the invoice and allow the bank to await payment from their customer. The requirements to qualify for an accounts receivable lending program are usually lower than for a traditional line of credit, but the cost is usually higher. The cost is comparable to what it would cost to accept credit cards for payment or if you were to offer quick pay discounts. This type of program is very beneficial for companies growing at 15% or more on an annual basis; for companies who can take advantage of supplier discounts; or for companies who work with large, slow-paying clients. It is important to make sure that the additional access to cash will more than offset the cost of a bank based accounts receivable program.

Lastly, factoring is an option for most businesses that do not qualify for any of the bank lending options. Factoring is usually performed by a non-bank entity who will lend money on accounts receivables based on the credit worthiness or your customer. Both of the above listed programs rely on the credit quality of your company. Factoring simply looks at the credit worthiness of your clients and agrees to purchase the invoice for a sliding scale fee. If your customer agrees to sign the documentation of the factoring company, you can send your invoice to the factor and usually get an 80% advance rate within a few days. The cost is determined by how long it takes for your customer to pay the factor. While this is the most expensive option, it is usually has very low qualifications.

In looking for ways to improve cash flow, it is important to know all of the options available and to allow the necessary amount of time to set up the best program for your business.