Debt Financing vs. Equity: Which Is Best For Your Business?

debt financingWhen it comes to raising money for your small business, there are many options to choose from. Small business owners can raise money from angel investors, obtain debt financing, or invest their life savings into the business. Ideally you don’t have to put up funds to keep your business going, which brings into question, what is best for your business, incurring debt or selling equity? First, a brief overview.

 

Debt vs. Equity: High Level Overview

When you take out a loan for your business, you incur debt and must pay back your lender. When you sell equity, you give up a percentage of ownership in exchange for the funds. Sometimes equity deals require you to pay a portion of profits to the investor, but usually the investor just receives their percentage of the sale price if you happen to sell your business.

 

Debt Financing: The Good, the Bad, the Ugly

Debt financing has many advantages and disadvantages, depending on your situation. The advantages include:

  • A vast array of products to choose from
  • Non-dilutive, you do not have to give up any equity
  • Debt financing is the cheapest pricing available for small business owners – cheaper than equity, cheaper than alternative funding products like merchant cash advances, and cheaper than using your own money.
  • Although there are many covenants and promises contained within any loan agreement, there are less strings attached than those you have with an investor.

One of the main advantages of debt financing is the vast array of products you can choose from, that best fit your business. The following are all debt financing products:

  • Small business loans: general working capital for your business operations (6-18 month terms)
  • Term loans: 3-5 year loans for expansion, acquisition of a competitor or opening up a new location
  • Lines of credit: funds you can draw upon as you need them, collateralized by inventory or accounts receivable
  • Invoice financing: advances against an asset called accounts receivable
  • SBA loans: 5-10 year loans for expansion, acquisition and general working capital.
  • Equipment loans: funds from the lender are specifically used to buy equipment, which serves as the collateral for the lender (i.e. you do not have to have any collateral to obtain the loan; the equipment purchased with the loan proceeds is the collateral itself. This is called a “purchase money security interest” or PMSI deal).

The disadvantages of debt financing include the repercussions associated with default and the potential damage to your credit score. Most debt financing products require a personal guarantee, which places any personal assets you own at risk should you default on the loan. Although the lender has the right to take your business assets as well, they don’t have to go after your business assets first in the event of a default. They can go after your personal assets or your business assets in any order they choose. Additionally, defaulting on a business loan can affect your business and personal credit, thus making it more difficult to get a loan in the future.

As a general rule of thumb, you should only incur debt if you have a proven and successful business model, and a clear path to revenue with the new funds (i.e. acquiring a new business with the loan proceeds, the cash flow of which can service the debt payments).

 

Selling Equity: Good for Some, Not for Others

Like incurring debt, selling equity has its advantages and disadvantages and these depend on the business owner’s goals and aspirations. The biggest downside to selling equity is that you give up a percentage of future profits for life, including proceeds from a sale.

If you’re looking for an investor, make sure they’re a strategic investor that is going to create value for your company – by doing things like introducing you to potential customers and referral partners. What you don’t want is an investor who doesn’t contribute anything. These are normally called “silent investors”, and you effectively work for them because a percentage of your profits is theirs forever (technically).

However if you have investors that are increasing the size of the pie for everyone – including your share – then it becomes far more palatable to give up a portion of profits for life.

Also, another downside to investors is that they often want control. Be careful when reading the legal documents to make sure that you will still have the freedom to operate with discretion in the day to day of your business. The last thing you want is to have to run everything by your investor, as they can severely hinder your growth if they try to protect their money with an iron fist. You need an investor who trusts you, believes in you and your business model, and will give you the freedom to operate (within reason, of course). The upside is that if things go south, that’s the risk the investors are willing to take (unlike a lender, who will take your assets).

You must weigh these options and interview both lenders and investors as if you’re interviewing a new hire. Drill them with questions to find out if they’re the right fit for you.

Slow Season Survival Tips for Small Business Owners

slow season survival tipsSlow seasons can be difficult for small business owners. Seasonal setbacks can arise that take a toll on stretched budgets and exploring new growth opportunities. Below are some slow season survival tips for small business owners used by various clients of ours. We hope you find them just as useful!

1. Offer products/services that are applicable all season

A good way to generate extra revenue is to bring on new products/services that extend beyond the seasons. Many business owners can find consistent sales difficult when certain products or services are seasonal. Services such as tanning salons find a higher uptick in the winter, with less volume in the summer; similar can be said about selling patio furniture in the winter months.

In order to circumvent a drop in sales over seasonal products and services, small business owners have traditionally used creative ideas to keep sales up during the off-season. Landscaping business can turn to tree and snow removal services in the winter to keep things running, and food trucks and seasonal restaurants can introduce new menu items to reflect the change of season. Retail stores can rotate new product lines, putting their off-season products in storage (or sell them to resellers and off-price stores) to make way for the upcoming months.

It’s important for small business owners to listen and learn about their customer’s habits. By identifying new areas of opportunity in their daily routine, businesses can sell new seasonal products and services to keep the revenue balanced throughout the sales year.

2. Spread operating costs and other expenditures out.

Seasonal businesses usually find finances to be most strained just before the prime season begins. It is always good for business owners to make a calendar-based budget to keep track of all steps along the way. Points to note should include personal tips such as the best times to hire staff, make business purchases, etc. This allows the business to allot necessary funds proportionately based on prior knowledge, efficiently and with ease. Viewing the budget on a monthly basis, or only focusing annually, is not the best way to ensure a business’ cash flow runs smoothly. Rather, budget for the year ahead, with view of the years to come – as this way the business owner can keep funds in their pocket to buffer any slow seasons ahead.

3. Try to negotiate contract terms with suppliers

It can benefit to speak with suppliers and make an attempt to negotiate contract terms. Talking to suppliers and vendors can help create more favorable credit terms, or to even modify existing contracts so that they work better for the business.

An example would be changing annual advertising contracts to seasonal contracts – saving a lot of money and giving more control over finances. Remember, it doesn’t hurt to ask! Many businesses find that suppliers are willing to grant seasonal businesses extended payment terms or offer similar arrangements to assist during slower business periods. Good relationships with vendors can help make this a possibility, especially when payments are made on time, sales volume is high, and when there has been a long history of business together.

4. Secure flexible working: #1 of all slow season survival tips

My financing institutions prefer to fund businesses just ahead of their busy season, because they know they will collect their money. Similarly, business owners prefer to have funds available just prior to busy season because they can deploy funds into revenue-generating activities. This allows the business owner to pay the financing institution back with new customer money (instead of having to tap into existing cash flow). Please let us know if we can do anything to secure you flexible working capital.

Top 6 Accounting Software Programs for Small Business Owners

accounting software programsThe search for the right accounting software can be tedious. As the choice depends on company needs, assessment includes company size, cash flow, accounting experience and company budget. Here are 6 top accounting software programs small business owners can turn to:

Wave Accounting

Wave has come a long way since 2010 as a free, cloud-based program. Now supporting 2.5 million users, the software provides free standard features, with a visually pleasing interface. Tools include billing/invoicing, estimates, expense tracking, and advanced sales tax settings. Available on Android and iPhone, Wave has added extra features for contact management, bank reconciliation, and lending.

Xero

Used by both small business owners and accountants, Xero offers over 500 tools to provide customization for company needs. Supporting multiple currencies, Xero revolves around handling payroll and payroll taxes. Optimized for collaboration between users and accountants, data is processed through a single ledger. Users can speed processes by creating invoices via preset templates, or by sending billing or invoicing statements directly online.

SlickPie

Suited for small businesses, SlickPie’s cloud-based platform brings an invoicing feature for online billing and document management with pre-set themes. Financial reports provide users with business growth analytics, and automates invoicing and payment reminders. It’s free to use, and provides an additional free tool called MagicBot for automated data entry.

QuickBooks Online

Commanding as one of the most recognizable software applications, QuickBooks offers both licensed and online versions. Invoices/billing can be electronically sent to customers, and accountants can find collections, fixed asset management, and cash management tools helpful. QuickBooks provides a 30-day free trial to see if it matches company needs.

Kashoo

Available on iOS and web, Kashoo’s cloud-based accounting software is priced at $12.95/month (free trial available). Online training webinars as available as well as support during business hours. With the ability to track expenses and income, users can invoice customers online and access payroll and tax management features. Kashoo stands out for its ability to deal with multi-currency expenses easily.

Sage 50

Popular amongst small to medium-sized businesses, Sage 50 include features for accounts payable, accounts receivable, bank reconciliation, and cash management. The payroll and employee management features makes it a unique option amongst competitors. Priced at $29.95/month.

Which accounting software programs are best for my business?

Start with free trials and find your optimal comfort level. It helps to obtain a list of requirements from each of your stakeholders so you know what to look for. Reviews online can be helpful, but view them objectively. Finally, remember to consider tools that other businesses in your industry are using.

 

Marijuana Financing for Legal Cannabis Businesses

marijuana financingAs of mid 2017, medical marijuana is legal in 29 states and 7 states have legalized recreational use. This has resulted in a “pot rush”, where many enterprising individuals are entering the market to somehow capitalize on marijuana. Successful existing cannabis businesses are growing tremendously, the weak ones are getting shaken out, and new players are stepping on the scene. All of this has resulted in a tremendous need for marijuana financing, namely working capital.

Marijuana Financing and Working Capital

A great working capital product for cannabis businesses is the “future revenue advance”. This product is structured as a purchase of future bank deposits (not a loan) so it complies with — and does not fall within the reach of — state regulators. Before we get into the details of how it works, here is a quick summary of the highlights:

  • Cheaper than investors – scale growth without giving up profits forever
  • No collateral required – business or personal
  • No personal guarantee – operate with the freedom to know your personal assets aren’t at risk
  • Often unsecured by funder – some funders don’t even ask if you have collateral
  • Funding in 24-48 hours – great for emergency or opportunities
  • 4 month revenue history – just getting started? No problem.

How it works

This type of funding requires no collateral and is often unsecured. The way it works is that the funding institution will “purchase” a chunk of future revenues from the business, in exchange for a fixed payback. Payment amount is determined by past bank deposit activity, and is often represented as a percentage of historical average deposits. Basically, payback is a fixed royalty (i.e. 10% of revenue) for a fixed period of time (until paid off).

Why It Works

The future revenue purchase is ideal for cannabis businesses for a few reasons. First, the time to receive funds is usually 48 hours. Second is that it is way cheaper than investors. A relatively new cannabis business might pay a lender 20-30% over 6-18 months, but that same business would pay an investor 20-30% for life for the same amount of money. Also bear in mind that this is more expensive than a traditional product like a loan because it is often unsecured, no collateral is required, nor is a personal guarantee. Lastly, there are no limitations for which the funds can be used.

Use of Funds

Funds can be used for whatever you want, however you want to deploy them in a way that makes sense, to either exploit an opportunity or prevent a disaster. Popular uses of funds include:

  • Expansion financing – we’ve had many clients use the funds to make a down payment on a new leasehold for expansion of their growth operations. Many cannabis businesses are on the hunt for new, bigger locations and are being outbid by their competitors. Having the capital in hand to back up your bid goes a long way. Funds can also be used to purchase heat lamps.
  • Acquisition financing – now that the market is becoming (relatively) more mature in states like Colorado and Washington, smaller players are realizing the struggle and offering their businesses up for sale. This is allowing the bigger players to capture more market share at scale. The revenue advance can be used to acquire existing businesses or assets from a business.
  • Working capital – sometimes businesses simply need the extra cushion in their bank account to bridge them to busy season. Or to hire new staff. Whatever the reason may be, this is a great marijuana financing solution provided however you have the margins to support the payback.
  • Emergency capital – as a business owner you know things can go wrong and fast. Having access to liquidity can help you prevent disaster by affording you the ability to remedy the situation as needed, and in a timely manner.

Example Marijuana Financing Deal

A typical revenue purchase for a cannabis business that averages $100,000 in deposits would look like this: the funder would purchase $125,000 of future revenues in exchange for $100,000 up front. Viewed differently, the amount the cannabis business would receive is $100,000 and the payback would be $125,000. Payments are usually 10% of average monthly deposits, or $10,000 in this case. So the payback time would be slightly over a year ($125,000 divided by $10,000 = 12.5 months).

Minimum Requirements

The revenue purchase is fast and flexible, so it is not overly burdensome for a cannabis business to obtain marijuana financing. Usually, here are the requirements to obtain a quote:

  • 1-page application – business name, Federal EIN #, etc. must be a business entity applying
  • 4 month revenue history – evidenced by bank statements, deposited into a business checking account, not a personal account

After you’ve obtained a quote, and you’d like to proceed with funding, the following is required:

  • Proof of ownership (i.e. tax return schedules)
  • Copy of a voided check
  • Bank statement and account verification
  • Copy of owner’s drivers license
  • If over $75,000, financial statements (P&L and balance sheet)

Contact us today if you’d like to learn more!

 

What is a Merchant Cash Advance (“MCA”)?

For a quick, one-time capital infusion into your business, the merchant cash advance (“MCA”) is an excellent option. MCAs, also known as credit card receivables funding, are a form of cash flow financing. The structure of an MCA is a lump sum of capital up front, in exchange for a fixed payback amount. Payments returned to the funder are received in the form of a fixed dollar or percentage of revenues (effectively a royalty) until the agreed upon repayment amount is met.

Payments are withdrawn directly from the bank account, on a daily or weekly basis, or remitted directly by the credit card processing company. The business’ cash flow (bank deposits or credit card processing volume) is the basis for funding as an option for short-term financing. As collateral is not required with a MCA, it is a suitable option for companies with few assets.

With same-day funding available, the typical turnaround for an advance is 2-3 business days. Often, deals under $100,000 are funded on the same day.

Benefits of an MCA

Merchant cash advances have many benefits. First off, MCAs are highly flexible, accommodating cash flow needs. Lower credit scores are not an issue, as the minimum FICO requirement is 500. Securing an MCA also helps re-establish and improve your credit score. Funding is secured by future cash flow, so if you have a solid cash flow but no assets, you can still qualify. Additionally, securing an MCA requires little stipulation compared to bank financing.

To obtain an offer, an application and four months of bank statements are required. If you process credit cards, your merchant statements will be requested as well. The financing company will require minimal documentation in order to close: a driver’s license, proof of ownership, and a void check. For larger deals, additional information such as your financial statements will be required.

MCA versus other options

When considering funding, it is good to bear in mind that equity is the most expensive option. Equity requires that a percentage of profits and losses are shared with your investor indefinitely. For MCAs, payback is provided as a fixed royalty for a fixed period. It’s perfect for high growth companies, capitalizing on opportunity, preventing disaster, or bridging your business to busy season. However if you are simply delaying the inevitable and your business is in a downward spiral, an MCA can hurt your cash flow significantly. So be careful!

Opting for a MCA is popular for many reasons. Purchasing inventory at volume in order to receive discounts can be completed quickly with an MCA. Having a short-term financing option on-hand for emergencies such as equipment failure can keep operations running smoothly.

An Entrepreneurial Profile: The Digital Media Publisher

factoring for openxThe digital publishing landscape is filled with opportunity, across so many different verticals. Publishers can include aspiring Buzzfeeds, in the business of creating “media” like content, or smart phone apps. Both publisher models earn money via advertising, and also drive revenue with advertising.

Digital Media Publishing

Successful publishers know exactly what type of media (i.e. free apps, articles) will be appealing to what audience. They spend dollars promoting certain articles or apps in front of certain audiences that will interact and eventually click on ads, in turn earning them revenue. Publishers use one to many vendors like Facebook, Google, AppNexus and others, that provide content promotion services across desktop and mobile. This digital publishing business model requires multiple skill sets and “whole-brain” thinking. By whole brain thinking, we mean that the publishers must be able to hone in on their intuition, and analyze it to make the right decisions.

Creativity: Required

Here is an example. First, a publisher must be creative in what type of theme they decide to build a business around. As a content publisher, the theme can be articles about lifestyles of the rich and famous, cool history facts, or photo galleries. For apps, it can be a utility such as a PDF scanner, or fun media like a face-filter app. The underlying commonality is that the creative ones will generate interest, eyeballs and ad revenue.

Second, after determining the theme, the publisher must make the interface (website or app) easy and smooth to navigate, and also continuously generate creative media to be consumed by the masses.

Third, for an audience to see an article or an app, publishers have to put it in front of them via advertising. This in turn requires more creativity because the ads must be creative to get people to the website.

Lastly, a publisher must know — or figure out — which audiences to place certain articles or apps in front of, and on what device. This requires a tremendous amount of creativity.

factoring for appnexus

In reality, a publisher can have the most genuine, entertaining and interesting media, but without good ads, it will never be seen by a huge audience. To get the media in front of the masses, digital publishers spends money via platforms Google, Facebook and MobX. Those firms take the publishers ad creative (ads about a publisher’s content or app), and they place those ad creatives in front of very specific audiences chosen by the publishers themselves.

Digital Media Requires Analytics

Promoting content in turn creates data for a publisher to analyze. What articles are working in front of which audience, on what platform and what devices? Are both desktop and mobile generating an ROI? Are winning campaigns from Facebook failing on Outbrain? What’s the download rate if a publisher changes the catch phrase on an ad creative? These questions and more must be analyzed with hard, firm numbers.

The ability to analyze results of ad creative and promotion is the compass for successful publishers.

Publishers must also know what tools to equip their website with to make sure it loads fast, looks nice and creates a residual revenue generating asset.

The n30, n60 and n90 issue

Unfortunately for publishers, they pay media promotion platforms much sooner than being paid advertising revenue. Average time to pay is 15 days, but average time to get paid is 50 days. Without access to cash, publishers often run up balances on credit cards to fill the gap, continuously paying it off as soon as they get paid ad receivables. This allows them to grow, but keeps all their profits tied up in the business — especially if they are hiring staff, content writers, and increasing ad spend on successful campaigns.

Invoice Factoring for Digital Media

Invoice financing is a great solution for digital media publishers for a couple of reasons, mainly because it provides publishers with liquidity to grow, enabling them to plow revenues into content marketing or paid user acquisition campaigns. For app and game developers, this is called “revenue recycling“. By obtaining an advance of outstanding advertising receivables, publishers have the necessary capital to plow into their growth initiatives. Publishers earning ad revenue from DoubleClick for Publishers, OpenX, Matomy, sovrn, MobX, Teads, Google Adsense, Criteo, Sulvo and others may qualify.

Are you a digital or traditional publisher? We’d love to see if we can help you grow by finding a partner to help manage cash flow. Contact us today at 1-833-Buy-My-AR.

Revenue and Profit: What’s The Difference? A Simple Explanation

revenue and profitIf you’ve been in business for yourself or you’re just starting out your business, you’ve probably heard the terms revenue and profit. Both of them mean very good things, but it’s very important to understand the differences. From a very high level, try to think of revenue as the cash your customers pay you in order for you to pay your bills. Whatever is left after that process is your profit. Before we dive into the details, I’d like you to keep these three very important items in mind.

 

3 Things are Absolutely True

As mentioned, revenue is the cash coming into your business from sales. Note that the term revenue is synonymous with “sales”. Secondly, profit is the money left over when you subtract all business expenses from revenues (and a loss – the opposite of profit – occurs if your business has more expenses than revenues). Lastly, you can never have a profit without revenue. Ever. There is no exception to this.

Revenue and Profit: The Differences

There are two main differences between revenue and profit. The first is the timing in which they occur, and the second is in the classification and types of each one.

Timing of Revenue and Profit

In theory, revenue occurs first. This is when your clients or customers pay you. Although profit may occur simultaneously because you have little to no expenses or already paid them, it requires math. You have to calculate revenues, and then deduct expenses, in order to determine profit (many accounting softwares do this for you). In sum, a client has to pay you first before you can calculate profit.

Classification of Revenue and Profit

Revenue is classified into two groups, accounts receivable (or “invoices“) and cash. And “profit” is grouped into three categories: gross profit, operating profit and net profit.

Revenue Classification #1Cash. This occurs when a customer or client pays you with cash.

Revenue Classification #2 – Accounts Receivable. A/R, also known as invoices, occur when you bill a customer and say “pay me in 30 days” for example. Your business doesn’t receive cash up front, rather, you wait to get paid. If you wait to get paid it would be helpful to learn how to find a factoring company.

Profit Category #1 – Gross Profit. This is calculated as revenue minus any costs associated with generating that revenue. For example, say a grocery distributor buys a case of Pop Tarts for $35.04, and sells them to the grocery store for $65.53 per case. The distributors gross profit is $30.49 per case ($65.53 minus $35.04 = $30.49). Now say the grocery store sells 16 boxes in the case for $5.55 each, or a total of $88.80. The grocery store’s gross margin is $23.27 ($88.80 minus $65.53) for the case. The gross profit divided by the revenue is called “gross margin”. For the grocer, the gross margin is 39.97% ($23.27 divided by $88.80). Meaning, 40% of the revenues generated from the sale of the Pop Tarts is gross profit. In sum, the gross profit is the revenue minus what it cost to generate that revenue, assuming there are no other costs involved. But usually there are.

Profit Category #2 – Operating Profit. This calculation takes into account those other costs. For example, the boxes of Pop-Tarts aren’t going to just magically appear on the shelves at the grocery store. Someone needs to put them there – that’s the labor cost. Next, the person placing the Pop Tarts on the shelves can’t work in the dark or heat, so the grocery store has lights and air conditioning – these would be utility expenses. Also, someone needs to actually ring out the Pop Tarts from the system when a customer buys them (more labor expense). So operating profit is the gross profit minus operating expenses like heating, air conditioning, electric, internet, rent, etc.

Profit Category #3 – Net Profit. This calculation is the simplest. It is operating profit minus one-time expenses, like paying your attorney for some corporate legal work, or spending $5,000 on a special marketing campaign that you know will be a one-time occurrence. Net profit is the money you “made” in your business.

Final Thoughts on Revenue and Profit

Depending on your business, it may be more relevant or important to focus on one of the profit categories more than the others. For example, if you have high gross margin but your rent and utilities are very expensive, you may want to focus on operating profit as you cut costs. Or if your gross profit margins are super thin, you may want to figure out ways to increase sales so that the actual gross profit goes up, in order to cover your expenses. Every business is different, and understanding the types of revenue and profit is necessary to grow your business.

 

 

How Factoring Invoices Can Help You Grow Your Business

grow your businessOften times when people hear about A/R factoring, they think that it’s a sign a business is in trouble. The reasoning why is that if a business is trying to get paid sooner, they must be in need of capital, which means they’re running out of money. This is a grave misconception that needs to be put to bed forever. Understand that while there are many distressed companies out there in need of capital to survive, there are far more healthy businesses that simply need working capital in order to grow. Read on to learn how invoice factoring can help you grow your business.

Why Businesses Need Invoice Factoring

Many businesses need factoring for one of two main reasons, and sometimes both. The first is that there is a mismatch between the timing of income and expenses, and the second is that businesses need access to cash as they grow. If you have invoices and plan to hit new revenue levels, you should consider factoring to grow your business.

Mismatch Between Income and Expenses

Take a print shop as a classic example. A print shop spends money on ink, paper, boxes and shipping. They make money by selling a final product of printed goods to a company. In order to begin the job, the print shop needs to have the ink and paper handy, meaning they must buy it up front. However, they do not get paid until delivery of the final product or sometimes 30-60 days after that. Therefore, in order to take on print job, a print shop must have cash readily available.

Rapidly Growing Businesses Need Liquidity

The second reason is that a business that is growing rapidly may need to access cash in order to pay vendors, suppliers, employees and to start a new job. Take the print shop for example. If in the above example the print shop spends all their funds to deliver printed goods to ABC, Inc., they must wait until delivery or longer to collect the money from that job. At which point the print shop will be made whole on their costs, and they’ll realize the gross margins on the job. However, say for example that the print shop gets 3 new jobs they must take on. This requires additional capital to purchase more ink and paper.

How Factoring Invoices Can Grow Your Business

Upon delivery of the final product to ABC, Inc., the print shop will usually issue an invoice for payment to be received in 30-60 days. Once that invoice is in hand, the print shop can “sell” that invoice to a factoring company for 80-90% of capital up front. This allows the print shop to use those funds to take on the new orders that just came in. Invoice factoring allows entrepreneurs to grow their business by freeing up future cash flow to be reinvested today.

Note however, that if the print shop has favorable terms with ABC, Inc. and receives cash upon delivery, the print shop can secure PO financing. The moment ABC, Inc. orders and issues a purchase order to the print shop, the print shop and obtain funding based on the PO value. PO financing is similar to invoice factoring except that PO financing is used to start a job backed by someone’s intent to purchase the product upon completion. Invoice factoring is funding used to accelerate payment after the job is complete. While you’re looking for A/R factoring companies, you should ask if they offer both PO and A/R factoring. You want a full capital stack to grow your business.

As always, if you’re in need of factoring quotes or would like us to review existing offers, please don’t hesitate to contact us.

Cash Flow Management Tips for Small Business Owners

cash flow managementAs a small business owner, you’re faced with many daily, weekly and lifelong challenges. One of the biggest challenges and most important is cash flow management. Mismanagement of cash flow creates cash flow gaps, which can literally put you out of business by missing a crucial bill like paying a supplier your business depends on.

A cash flow gap occurs when your expenses come due prior to revenues coming in. It’s not that you can’t afford your expenses, it’s just a timing difference – you don’t have the cash flow (yet) to pay the bills. For small business owners, cash flow gaps can occur from delayed payment terms, fluctuations in business, and an unexpected additional capital commitment to start a job.

Use the following tips to help avoid any pitfalls in your cash flow.

 

Cash Flow Management is a Frame of Mind.

Small business owners should operate in large, broad frame of mind that is always asking, “how does this affect my cash flow?”. Think about what the net benefits and costs are of each purchase you make or deal you book. Also try to think of the timing of it. Ask yourself if you have enough cash on hand or access to credit (i.e. like an American Express for business). If not, don’t book the order or agree to purchase anything, unless you have very favorable terms.

Map Out Your Dollar Life Cycle

To successfully manage cash flow you need to understand the road map of each and every dollar. Ask yourself this – if you take $1 right now, and deploy it into your revenue generating activities, how many rest stops will your dollar make? How many hands touch that dollar before it comes back into your bank account? How long will it take to get into your bank account? Understanding the flow and timing is crucial.

Be Conservative with Timing

You can be conservative with your cash flow management approach in 2 days, neither of which are mutually exclusive. First is to be conservative with the timing of revenues, and the second is to be conservative with the amount. Think you’re doing to get paid in 10 days? Call it 15. Issuing an invoice payable in 30 days? Bank on getting that money in 36 days. It’s important to add buffer zones to the timing of your income and expenses, to keep expectations in order. If you manage your expectations, you can manage your cash flow a lot easier. Also, you should underestimate sales. If you buy 5,000 units of a product and based on past data you expect to sell it over the course of 2 months, budget as if you’re selling it over 3 months. This way if things slow down, you don’t run out of money.

Build a Cash Reserve

Cash is king. It never, ever hurts to have additional cash on hand. Pay yourself $10-$20 per day, or something nominal. Make sure you can afford to set aside cash. Figure out what the number is, divide it by 21 (for each business day), and set aside that money into a separate reserve account. Having a cash reserve can be used as a way to bridge cash flow gaps if they occur.

Explore Invoice Factoring

Factoring your accounts receivable is a great cash flow management tool. Although it costs 1-2% per month, consider this a revenue share for outsourced cash flow management. With invoice factoring, you can pick and choose which receivables you want to sell on a daily, weekly or monthly basis and as you generate them, accelerate the cash from them. Let us know if you need help finding an accounts receivable factoring company, we’re happy to help.

 

How to Pick a Factoring Company That Best Fits Your Needs

how to pick an invoice factoring companyThere are many advantages of invoice factoring, but choosing a traditional or new-age factoring company can be difficult. Between long term contracts, vague terms, hidden fees and penalties, and minimum monthly funding amounts, a true factoring facility often leaves a lot to be desired. We hope you find this article helpful in choosing the right factoring company to best fit your needs. As always, don’t hesitate to reach out to us to review a factoring deal you have on the table. We’re happy to help!

Transparency in Rates and Fees

Many factoring companies, unfortunately, don’t make it easy to determine their total fees. Often times invoice factoring companies will have an underwriting fee, a discount fee, an early termination fee, and a misdirected payment fee. Here is a quick breakdown of what those are:

Underwriting Fee – this usually goes toward the actual expenses involved in underwriting your deal, like a background check and UCC filing / release. Careful this is not egregious. It’s very customary to be charged an underwriting fee and factoring companies have every right to do it, but it cannot be outrageous. It should be simply to cover costs. Request specifically: a break down of what it costs to do 1) background checks, 2) debtor underwriting and 3) UCC filings / releases. Ask that they don’t charge you anything more than cost.

Discount Fee – this is a one-time fee, usually as a % of total invoices purchased, charged in the first month. You can probably negotiate to have this waived.

Early Termination Fee – if you terminate the contract too early, you may be charged a flat rate fee of $5000-$10,000. This would be above and beyond the buyout (the buyout is the total amount of your invoices that are now owed to the factoring company). Request specifically: a waiver of early termination fees if you are terminating the factoring relationship in exchange for a bank line of credit (or some other type of financing from an FDIC insured institution). If a factoring company pushes back on this request, they’re simply in it for themselves and don’t care about your long-term prosperity.

Misdirected Payment Fee – if your customers improperly pay you (on purpose or accident), then you will be charged a percentage of the invoice value that was inadvertently paid to you. The reason being is that the factoring company cannot prove whether or not the misdirected payment was done at your direction. Therefore, to avoid this fee, receive written assurance (via a UCC notification/acknowledgment letter provided to you by the factor) that payment will be directed to the factor.

Also ask your factor if they pro-rate the factoring fees in the first month of funding, or if they charge you a full month’s worth. For example, if your quoted factoring fee is 2%, it will be pro-rated on a daily basis. Meaning if you get funded mid-month, you will be charged 1% (for half a month). However, some factors charge the full 2% in the first month of funding, regardless of when the funds hit. This is pretty standard, however it should be conspicuously disclosed in the term sheet or the factoring company should call it to your attention.

 

Look for Flexible Terms

Let’s be realistic, factoring your invoices is a lot like staying in a hotel. You don’t do it all year around, only when you travel (or need to). Therefore, you should look for a term that is 6-12 months, or spot factoring (spot factoring is a one-off sales of your individual receivables, at your choosing). The problem with a long-term relationship is that factoring might not make sense for you in 8 months, for example. Your business could be cash-flow sufficient, so why factor your invoices? If you get yourself into a long-term contract, it’s important to have a scapegoat, so try to negotiate your way out of any early termination fees.

 

Choosing The Right Factoring Company

The most important thing is transparency. Factoring companies, much like you, are in the business of making money. So finding a deal with no fees is quite hard. But if the factoring company is honest, open and transparent from the outset about what they will charge you, then that is the most important. What you don’t want are hidden fees and surprises, so be sure to ask the right questions and understand the deal from the very beginning. Lastly, you want to enjoy who you’re working with. If they offer you a good deal but the factor gives you bad vibes (for whatever reason), move on. Go with your gut, make sure you like who you are working with – a factoring company should be viewed as a partner.

As mentioned, we are always here to help you review a deal or find you a better offer. Contact us any time to help you pick the right factoring partner.