Even companies with the best preparation and forecasting can experience cash flow problems. Something unforeseen happens: a vendor or client declares bankruptcy, an order is cancelled, or, as often happens, commercial clients start paying slowly. Something unexpected triggers a chain of events leading to the problem.
Although it’s difficult to plan a contingency for every possible scenario, a little preparation can help minimize the chances of running into problems.
Build a cash reserve
The simplest way to prepare your company for a cash flow shortage is to build a capital reserve. This basic step helps you through most financial problems.
Although the necessary size of the reserve is a matter of debate, it’s a good idea to have enough money to run the company for a few months. This goal sounds difficult, but every company must have a reserve. It’s best to start building one slowly and early, little by little.
Accelerate client payments
You can also mitigate the effects of a cash squeeze by accelerating your client payments. Most companies get into a cash shortage because commercial sales are handled on terms that give clients up to 60 days to pay an invoice. Without a cash reserve, waiting for payment can be difficult.
You can fix this problem by asking clients to pay sooner. Many clients will pay sooner if you offer an early payment discount. Obviously, a discount improves your clients’ profitability, so many clients are open to this option.
Keep in mind, however, that early payments are optional and clients can opt out at any time. Consequently, asking for faster payments does not produce reliable results, especially if your cash flow squeeze is severe.
Finance your slow-paying invoices
If your clients pay on 60-day terms and are not interested in a quick payment discount, consider factoring your invoices. This solution complements your cash reserves and can be used when clients do not want to pay sooner.
Factoring works by partnering your company with a factoring company that buys your invoices from slow-paying but creditworthy commercial clients. This strategy provides your company with immediate working capital to cover business expenses and take on new clients.
To qualify for this funding, you must work with creditworthy commercial clients and your invoices should not be threatened by encumbrances. The advantage of invoice factoring is that it is easy to get and can be deployed quickly. Lines can often be deployed in a week or two, making them an ideal option for companies with a cash shortage.
How does invoice factoring work?
Factoring transactions are often structured as the purchase of your invoices in two installments: the advance and the rebate. The advance covers about 80% of your invoice and is funded as soon as your work is completed and you have invoiced your client. The remaining 20% is rebated, less a fee, once your client pays the invoice on their agreed terms. You can find more information by reading this article.
Grow and avoid cash flow problems
From a strategic point of view, invoice factoring allows you to offer payment terms to clients without having to worry about slow payments. This solution can help if your company has declined to offer trade credit to clients in the past. And because the line is tied to your sales, it can increase as your revenues grow.
As a result, invoice factoring can be an ideal option for growing companies who want to minimize cash flow problems created by slow-paying clients.
Get more information
We are a leading factoring company and can provide high advances at low rates. For information, get an online quote or call (877) 300 3258.
Disclaimer: This article should not replace competent financial advice. If your company has cash flow problems, please see a professional.