Most tool and die businesses – making jigs, fixtures, dies, or other components – have a common cash flow problem. They have immediate expenses, such as raw materials and components, equipment suppliers, machine repairs, and staffing costs, that tend to add up quickly.
On the other hand, most revenues flow in slowly because corporate clients demand payment credit terms.
Credit terms create cash flow problems
If you sell products to industrial and manufacturing customers, you often wait to get paid because most commercial sales are done on credit terms, in which the client gets the option to pay in 30 to 60 days. As a tool and die company, you have little negotiating power in this matter – especially if you are dealing with a large company.
If you don’t offer term credit, one of your competitors will.
However, most small tool and die companies cannot wait this long for payment and need funds to cover ongoing expenses. There are three ways to handle this problem.
Ask for faster payments
As simple as it sounds, asking customers for quick payments often solves this cash flow problem. Many customers pay sooner if you offer them a 2% discount as an incentive. This offer can be an attractive alternative for clients because it improves their profitability.
The challenge with this approach is that your clients ultimately decide if they want to pay quickly or not. Since they can change their mind at any time, asking for quick payments is an unreliable solution.
Build a cash reserve
A second approach is to build a cash reserve slowly over a few months or years. Ideally you want a reserve large enough to cover critical expenses for a few months. Six months is considered ideal, but out of reach, for many small business owners.
Use business financing
A third approach is to use business financing to cover company expenses while waiting for clients to pay. Many companies use a combination of their own reserves and business financing as a way to operate their company.
However, finding business financing can be difficult for most small and growing tool and die companies. Most banks and conventional lending institutions only finance companies with excellent financial statements and sufficient cash flow to cover the cost of factoring invoices.
Factoring improves cash flow
A better approach is to factor your invoices. This specialized form of business financing solves the problem of slow-paying commercial clients and improves your cash flow.
Invoice factoring works by partnering your company with a factoring company who finances your invoices as soon as the work is completed, giving you immediate working capital to pay corporate expenses. The transaction settles once your customer pays their invoice in full on their regular schedule.
Most invoice factoring lines are easy to get, compared to securing bank loans and lines of credit. The most important requirement is to have creditworthy commercial clients. Aside from that, your company must be free of major problems and have good invoicing practices.
One advantage of invoice factoring is that it lets you offer payment terms to clients without having to worry about cash flow problems. Also, the line is flexible and can increase as your business grows — making invoice factoring an ideal option for growing tool and die companies needing help with working capital to cope with sales increases.
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We are a leading factoring company and work with tool and die companies. For information, get an instant quote or call us at (877) 300 3258.