For most budding entrepreneurs, having access to credit has been critical to the success and growth of their small business. Credit, in the form of bank loans and lines, enable small businesses to expand, acquire equipment, and alleviate short falls in cash flow. However, large financial institutions and banks, whom most small businesses rely on for financing, have very rigid lending procedures and a lengthy list of requirements that not all small businesses can meet (1). One of the most frustrating experiences for a successful small business owner is receiving a "No" from their bank because they didn't fit into the mold. So, how do you find the funding necessary when your bank says "NO?"
Within this post we'll look at how to find your "Yes" when a bank says "No." Specifically, how to find the funding you need to eliminate one of the leading causes of why healthy, growing businesses, with a great future ahead of them, go bankrupt. A problem that kills one of every four small businesses (2):cash flow problems! Or, not having adequate cash on hand to pay day-to-day expenses.
The Culprit Behind the Necessity of Short-Term Funding
You are excited! It is September 1st and you just received a dream order with a delivery date of November 31st, an order which could take you to the next level. You eagerly start production, but by October you are dangerously low on cash because your other customers are late on their payments or worse, they are insolvent and can't pay you. In the meantime, the clock is ticking, and you need to buy additional materials, pay your factory and employees to finish this new order. Does this sound familiar to you? It is an unpleasant and stressful situation for any business owner to be in... on the cusp of losing their business because they didn't have enough funds to finish the dream order.
In this increasingly competitive world where virtually all businesses aggressively pursue new revenue streams and Business-to-Business sales (B2B) such as manufacturers selling directly to retailers, cash flow challenges are becoming more acute. Having a great product is no longer enough to attract new business, the small business owners must also offer attractive terms to buyers (e.g. net 30/60 or even net 90). If expansion is in the cards, terms play an even larger role because it entices buyers to place larger orders and attracts new accounts. However, these terms negatively impact your cash reserves by creating an imbalance in cash flows; while expenses are in real time cash from sales take 30 to 90 days to arrive. When you encounter these situations as a result of you offering terms, it is best to grab the bull by the horns with a clever solution.
The Solution - Factoring
So how does factoring work and what are the requirements? As opposed to banks, which rely heavily on credit and profitability matrices to extend loans and lines to businesses, factors focus on the ability of entrepreneurs to execute - e.g. create a great product and ship on time - and their ability to make sound business decisions. By executing and making shipments on time, the entrepreneur creates a strong asset class in the form of receivables which a factor can collateralized and lend against, injecting much needed cash into the business. For example, if you are a shoe brand who just shipped $100,000 in exquisite shoes to Nordstrom with a Net-60 term, the factor would be able to lend you $50,000 to $80,000 within days, if not hours, so that you can pay your employees and suppliers. You can even start a new project and grow the business instead of stressing out over your overdue bills.
Commercial factors look to solve cash flow problems that originate from imbalances between cash inflows and outflows. But more than that, they can act as the credit backbone of your growing business, taking on the burden of collections and safeguarding you against customer defaults.
Contact me at firstname.lastname@example.org if you want to unlock your cash flow.
1. Gordon Mills, Karen, and Brayden McCarthy. "The State of Small Business Lending." Harvard Business Review 22 July 2014: 4-5.
2. Pofeldt, Elaine. "5 Ways To Tackle the Problem That Kills One of Every Four Small Businesses." Money. May 19, 2015. Web
All the best,
Kenneth L. Wengrod
President / Co-Founder
FTC Commercial Corp.
Delegated Authority Lender with the Export-Import Bank of United States