A very common problem for small businesses is managing cash flow when you extend credit to your customers. Here is a common scenario:
You land a huge job for your architecture firm as a subcontractor. The general contractor has hired your firm to design a new building. Unfortunately, you aren’t able to invoice the general contractor until you have completed 50% of the work, but your expenses don’t wait. While you spend 30 days to complete the first half of the design you have to pay your employees, your rent, utilities, internet and phone bills etc. Then you bill the contractor, but they won’t pay for an additional 45 days while you continue to pay more expenses.
This is a difficult situation from a cash flow perspective, so a number of subcontractors utilize lines of credit to stabilize the situation. In the 2008 banking mess, many banks reduced or eliminated lines of credit to small businesses, so many have been forced to factor their receivables.
According to Entrepreneur.com, “A financing method in which a business owner sells accounts receivable at a discount to a third-party funding source to raise capital.”
The problem is that there has been a negative connotation that goes along with factoring receivables. It may look like you are unstable as a business, and it may scare away your customer. Worse yet, the company that purchased your receivables may start calling and nagging your customer to pay up.
So the question is whether or not there is a way to factor receivables without sacrificing your customer relationships.
The answer is… It Depends.
Here are a couple of options that past clients of mine have used:
Interface Financial – This group is established and trusted, and can cater to smaller businesses more easily; however, they will contact your clients directly which may not work for you.
Receivables Exchange – This is a web based platform that is very powerful, but is currently only available for businesses that have rather large invoices.
Make sure to learn about each option yourself, but either one could solve your financing problems in a relatively efficient and elegant way.