As a machine shop owner, you experience the constant tug-of-war between expenses and revenues. On one hand, suppliers demand prompt payments, employees need to be paid every week or two weeks, and you have other expenses piling on.
On the other hand, industrial and commercial customers usually pay invoices in net-30 to net-70 days. Unless you have a substantial cash reserve to manage operating costs, you could soon run into cash flow problems – even if your company is profitable.
It’s best to nip working capital problems in the bud. Otherwise, they can grow, often insidiously, until they threaten your business. You may have to delay payments to suppliers, who may start demanding even tougher terms. Other payments may get juggled. In the end, if left unchecked, things can spiral out of control.
There are three ways to solve this problem.
Option #1: Ask for faster payments
One simple way to solve this problem is to ask customers for faster payments. Some may actually be happy to pay sooner, especially if you offer a discount on their invoices. A 2% discount for a net-10 payment is a common industry practice.
If your cash flow problems are not serious, consider implementing this strategy. However, remember that clients have the option to pay slowly at any time, so you should probably try to build a reserve as well.
Option #2: Build a reserve or add capital to the business
Having a reserve is useful because it allows you to run your business during lean times. Obviously, the best time to build a reserve is during good times, when revenues are plentiful. Or, you could also build a reserve by adding capital to your business.
The challenge with this strategy is that most business owners are already “tapped”: they have invested most of their money into the business. There is little additional money left to invest.
Option #3: Get business financing
If building a reserve is not an option because you lack the capital or are in a cash flow crunch, your next alternative is to get financing to stabilize your machining and metal working company, and then focus on improving your financial situation.
If your company is large and has assets to use as collateral, consider working with a large financial institution. But if your company is small and lending institutions are not an option, consider factoring.
Factoring is specifically designed to help machine shops with cash flow problems by financing receivables from slow-paying, but creditworthy, clients. This solution provides the working capital needed to run your company and grow.
Here is a detailed product explanation. Basically, your invoices are financed by an intermediary using the credit strength of your client as collateral. The net effect of using receivables factoring is improved working capital.
Offer payment terms with confidence
However, the main benefit of factoring invoices is that you can offer terms to clients with confidence because you can always finance an invoice if you need money to cover expenses. Also, most factoring companies can assist in evaluating the creditworthiness of clients – helping you determine which clients have solid payment track records (and deserve terms) and which have a higher risk of becoming a bad debt or a write-off.
Easier to get than a business loan
Qualifying for factoring is easier than getting conventional financing. Obviously, since the company is funding your invoices, you must have solid customers with good payment track records. Also, your machine shop needs to be reasonably well managed and have good prospects for growth.
When used correctly, factoring invoices can be an ideal solution for machining companies with a working capital crunch due to slow-paying clients.
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We are a leading factoring company and work with machining and metal working companies. For information, get an instant quote or call us at (877) 300 3258.