Are you a small business owner who is suddenly facing an uncertain future, a future where financing is hard to come by and where delinquent customer payments aren’t the exception to the rule, but the only rule? If this is your first time visiting my site, then you’ve not read the posts I’ve included about some of the simple ways to improve your small business financing. It’s never easy to deal with an uneven cash position. Given the current state of the economy, the pending issues in the Euro zone and the prevailing concerns of businesses about the future of business financing, I thought it once again necessary to allay these fears. As bad as it might seem, there are solutions.
Most enterprises list cash flow among their biggest concerns. However, it’s important to distinguish between manageable cash flow issues and ones that are more difficult to manage. For instance, if your small business has a healthy backlog of customer orders, consistent demand for its products and a viable offering that is appreciated within your market, then you need not be too concerned. Granted, it’s not easy to deal with, and an uneven cash position does mean higher financing costs. It’s a constant feedback loop where each delayed customer payment means your company itself is late paying bills, expenses, or worse, covering payroll. Either way, these delinquent customer payments will cause your financing to increase. So, what are some of the options you have available to you?
1. Asset-Based Lending: One established alternative to conventional business financing is to use asset-based lending. Now, most cringe at the thought of using alternative financing and assume that asset-based lending is the domain of companies that are unable to secure credit. However, this simply isn’t the case. In fact, these options have become increasingly popular amid an economy where conventional financing costs are skyrocketing.
A. Receivables factoring is one solution predicated on using the liquidity within your customer’s unpaid invoice as a form of business collateral. The financing company advances you funds and takes over the responsibility of receivables collection. You defeat the daily cost of money and ease the burden of an uneven cash flow. Factoring isn’t a loan and therefore won’t appear as a liability on your company’s balance sheet.
B. Purchase order financing is another solution. Much like factoring, the financing company advances you funds for current customer orders and backlogs. You secure the money you need to run your operations, purchase raw materials and parts and once your product ships, the financing company then collects on the invoice directly from your customer. Now, is it all good and no bad when it comes to asset-based lending? Of course not! Like any financing option, there are pros and cons. However, these options are becoming increasingly popular across multiple industries.
To read more about factoring, please read Measure Factoring Costs Against Standard Bank Loan Financing. The post includes an example of how to determine when and where to use factoring on a given customer account.
2. Incentivizing Prompt Payment & Prepayment: Your company has several tools at its disposal to alleviate the concerns of an uneven cash position. For instance, you can lower pricing to incentivize customers to prepay their entire order, or prepay a portion of their order. You can use net-10 day terms, 1% discount on invoices to encourage prompt payment. Or, you could focus your efforts on those customers who can’t secure credit. Customers who aren’t credit worthy are easy to sell to because very few companies actually spend any time trying to win their business. Not only do they improve your cash position, but they also defeat the daily cost of money.
3. Liquidate Outdated Inventory: Reducing your company’s inventory holding costs and alleviating cash flow concerns can go together. If you have product you can sell at a reduced price, then now is the time to sell it. Liquidating outdated inventory reduces your inventory financing costs and provides instant cash. Does this mean you’ll need to sell some of your inventory at reduced prices? Yes, it does. Will this help reduce cash flow issues? Yes it will. Should you entertain selling defective product as scrap – especially if it’s the only way to secure any cash? Yes, you should. Why would you hold product you know you’ll never get anywhere near full value for? Understand the importance of immediately liquidating dead stock and empower your sales team to make deals when they present themselves.
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