Turn On The Cash Flow Tap With Single Invoice Finance

Are your customers taking so long to pay their bills that you can’t meet your own commitments?

Has your bank manager run out of patience and put a choke hold on your credit line?

If that is the case you might like to consider a finance alternative which can get the cash flowing through your business again without the need to extend your debt.

The product is called single invoice finance. It is a relatively new development in the debtor finance space.

Like other types of debtor finance – a.k.a. factoring and invoice discounting – it allows businesses to raise funds by selling invoices at a small discount to their actual value. This gives the seller immediate access to working capital rather than having to wait up to 90 days for his or her customer to pay.

What makes single invoice finance different is that it doesn’t require the seller to enter into a long-term contract to sell invoices – as is the case with traditional factors and invoice discounters – which can handcuff a business and gives the factor too much control over it.

The new development allows a business to sell just one invoice or multiple invoices depending on its need and when the “crisis” is over move on without any further obligation.

This puts the business owner in greater control of the relationship because he or she decides how many invoices to sell and when. There are many benefits of single invoice finance, but this is probably the best.

This funding model also makes it possible for start-ups and businesses with patchy financials to obtain cash because the finance providers are mostly interested in the strength of the debtor and the invoice.

Such things as a customer’s turnover, number of customers and the provision of property security are not such a big deal.

Single invoice finance is particularly useful if a company receives a large new order and needs to buy stock to create the product. If there is no cash in the bank the business owner can obtain the required funds by selling an outstanding invoice.

The invoice finance company will pay up to 90% of the value of the invoice immediately. The remaining 10% is passed on when the customer settles the account. The funder takes its fee from this amount.

Financing Cash Flow Peaks And Valleys

For many businesses, financing cash flow for their business can be like riding a continuous roller coaster.

Sales are up, then they do down. Margins are good, then they flatten out. Cash flow can swing back and forth like an EKG graph of a heart attack.

So how do you go about financing cash flow for these types of businesses?

First, you need to accurately know and manage your monthly fixed costs. Regardless of what happens during the year, you need to be on top of what amount of funds will be required to cover off the recurring and scheduled operating costs that will occur whether you make a sale or not. Doing this monthly for a full twelve month cycle provides a basis for cash flow decision making.

Second, from where you are at right now, determine the amount of funds available in cash, owners outside capital that could be invested in the business, and other outside sources currently in place.

Third, project out your cash flow so that fixed costs, existing accounts payable and accounts receivable are realistically entered into the future weeks and months. If cash is always tight, make sure you do your cash flow on a weekly basis. There is too much variability over the course of a single month to project out only on a monthly basis.

Now you have a basis to assess financing your cash flow.

Financing cash flow is always going to be somewhat unique to each business due to industry, sector, business model, stage of business, business size, owner resources, and so on.

Each business must self assess its sources of financing cash flow, including but not limited to owner investment, trade or payable financing, government remittances, receivable discounts for early payment, deposits on sale, third party financing (line of credit, term loan, factoring, purchase order financing, inventory financing, asset based lending, or whatever else is relevant to you).

Ok, so now you have a cash flow bearing and a thorough understanding of your options available for financing cash flow in your specific business model.

Now what?

Now you are in a position to entertain future sales opportunities that fit into your cash flow.

Three points to clarify before we go further.

First, financing is not strictly about getting a loan from someone when your cash flow needs more money. Its a process of keeping your cash flow continuously positive at the lowest possible cost.

Second, you should only market and sell what you can cash flow. Marketers will measure the ROI of a marketing initiative. But if you can’t cash flow the business to complete the sale and collect the proceeds, there is no ROI to measure. If you have a business with fluctuating sales and margins, you can only enter into transactions that you can finance.

Third, marketing needs to focus on customers that you can sell to over and over again in order to maximize your marketing efforts and reduce the unpredictability of the annual sales cycle through regular repeat orders and sales.

Marketing works under the premise that if you are providing what the customer wants that the money side of the equation will take care of itself. In many businesses this indeed proves to be true. But in a business with fluctuating sales and margins, financing cash flow has to be another criteria built into sales and marketing activities.

Overtime, virtually any business has the potential to smooth out the peaks and valleys through a more robust marketing plan that better lines up with customer needs and the business’s financing limitations or parameters.

In addition to linking financing cash flow more closely to marketing and sales, the next most impactful action you can take is expanding your sources of financing.

Here are some potential strategies for expanding your sources for financing cash flow.

Strategy # 1: Develop strategic relationships with key suppliers that have the ability to extend greater financing in certain situations to take advantage of sales opportunities. This is accomplished with larger suppliers that 1) have the financial means to extend financing, 2) view you as a key customer and value your business, 3) have confidence in the business’s ability to forecast and manage cash flow.

Strategy # 2: Make sure where possible that your annual financial statements show a profit capable of servicing debt financing. Accountants may be good at saving you income tax dollars, but if they drive business profitability down to or close to zero through tax planning, they may also effectively destroying your ability to borrow money.

Strategy # 3: If possible, only transact with credit worthy customers. Credit worthy customers allow both the business and potential lenders to finance receivables which can increase the amount of external financing available to you.

Strategy # 4: Develop a liquidation pathway for your tangible assets. Equipment and inventory are easier to finance if lenders clearly understand how to liquidate the assets in the event of default. In some cases, businesses can get resale option agreements on certain equipment or inventory from prospective buyers assignable to a lender to be used as recourse against a lending facility for financing cash flow.

Strategy # 5: Joint venture a sales opportunity with another business to share the risk of a large sales opportunity that may be too risky for you to take on yourself.

Summary

The primary long term objective of a business with fluctuating cash flow and margins is to smooth out the peaks and valleys and create a scalable business with more of a predictable sales cycle.

This is best achieved with an approach that including the following steps.

Step #1. Micro Manage your fixed costs and cash flow and accurately project out the cash flow requirements of the business on a weekly basis.

Step #2. Take a detailed inventory of all the sources you have for financing cash flow.

Step #3. Incorporate your financing constraints into your marketing approach.

Step #4. If possible, only transact with credit worthy customers to reduce risk and increase financing options.

Step #5. Work towards expanding both your financing sources and available source limits for financing cash flow.

Business cycle stability and cash flow predictability is an evolutionary step for every business. The industries with longer sales cycles will tend to be the more difficult to tame due to a larger number of variables to manage.

Cash Flow Terminology and the Business Owner

Small business owners often fail to understand the consequences of inadequate cash flow management until the harsh realities of business life kick in. Typically one significant occasion is when insufficient funds are available within the business to meet the business liabilities.

It may be that business plans have been developed, income statements prepared and cash flows projected. The business owner may have been actively involved in this work or may have delegated the task to a third party and treated the business planning process as a desk top exercise.

Following the completion of the plans and reports, what follow up action was taken?

Were those same plans filed, not subsequently reviewed and no corrective actions taken to bring any actual results that were worse than forecast back to plan?

If this scenario is familiar a contributory factor may be a lack of understanding of what the terminology used actually means and may scare the business owner from taking action.

To help enhance the knowledge of the small business owner some of the common terms associated with cash management are explained below.

Cash Balance
The amount of money belonging to the business and available to legitimately expend, or the amount of money the business owes to a financial institution usually by way of a bank overdraft facility.

Cash Flow
Simply cashflow is the difference between monies coming into the business and monies going out of the business, and measured across a period of time. The measurement may be a day, a month, year or such period the business owner may determine.

Actual Cash Flow Statement
This is an analysis of all cash flow movements during the given period of time. It will summarize all monies received and monies expended. There are three elements to consider and report on. These are:

- the operating activities (cash flow from selling goods and cash flow from paying expenses)

- the changes in fixed assets (cash flow from sale or purchase of assets)

- the changes in forms of finance (Cash flow from borrowing or repaying loans and cashflow movements in contributions by and distributions to owners)

Cash Flow From Operations
This is the part of the cash flow that is directly attributable to the performance (profitable or otherwise) of the business. Excluded from these numbers would be cash movements related to items such as extraordinary events and sale or purchase of assets.

Cash flow from operations is the sum of the profit for the period in question plus the value of the non-cash items, such as depreciation, that have been charged against profits. To this figure is added or subtracted the movement in working capital during the period to give the Cash Flow from Operations.

Cash Flow from Non-Operational Activities
Included under this head will be included all cash movements arising within the business not directly associated with normal trading activities. This will include but not limited to the sale or purchase of fixed assets, for example plant and machinery and furniture and fittings; together with an increase in or repayment of business loans.

Source and Application of Funds
This term is used to differentiate between the monies coming into a business and the monies going out. Monies coming into a business will be the source and will include sales cash received, proceeds from the sale of a fixed asset and the increase in loans borrowed.

The application of funds relates to cash that is expended by the business, and would include the payment of goods or services, the purchase of fixed assets or the repayment of business loans.

Forecast Cash Flow Statement
A similar convention to the Actual Cash Flow Statement, however, this will project the anticipated cash flow movements for some future period of time.

Cash Accounting
A method of accounting that records in the books of account cash receipts as a sale on the day the cash is received and treats cash payments as expenses on the day of payment.

Profit v. Cash
The profit of a business should not be confused with the cash position of the business. A satisfactory cash flow position will almost certainly be dependent upon profits being generated.

However, remember that high non-operational cash outgoings may significantly reduce the operational cash generated resulting in a cash balance much lower than the reported profit.

Alternative Financing Can Help Offset Cash Flow Challenges Presented By Slow-Paying Customers

The statistics may say that the U.S. economy is out of recession, but many small and mid-sized business owners will tell you that they’re not seeing a particularly robust recovery, at least not yet.

There are various reasons for the slow pace of recovery among small businesses, but one is becoming increasingly apparent: A lack of cash flow caused by longer payment terms instituted by their vendors. Dealing with slow-paying customers is nothing new for many small businesses, but the problem is exacerbated in today’s sluggish economy and tight credit environment.

This is ironic given the fact that many big businesses have accumulated large cash reserves over the past couple of years by increasing their efficiencies and lowering their costs. In fact, several high-profile large corporations have announced recently that they are extending their payment terms to as long as four months, including Dell Computer, Cisco and AB InBev.

So here’s the picture: Many large corporations are sitting on huge piles of cash and, thus, are more capable of paying their vendors promptly than ever before. But instead, they’re stretching out their payment terms even farther. Meanwhile, many small businesses are struggling to stay afloat, much less grow, as they try to plug cash flow gaps while waiting for payments from their large customers.

How Alternative Financing Can Help

To help them cope with these kinds of cash flow challenges, more small and mid-sized businesses are turning to alternative financing vehicles. These are creative financing solutions for companies that don’t qualify for traditional bank loans, but need a financial boost to help manage their cash flow cycle.

Start-up businesses, companies experiencing rapid growth, and those with financial ratios that don’t meet a bank’s requirements are often especially good candidates for alternative financing, which usually takes one of three different forms:

Factoring: With factoring, businesses sell their outstanding accounts receivable to a commercial finance company (or factor) at a discount, usually between 1.5 and 5.5 percent, which becomes responsible for managing and collecting the receivable. The business usually receives from 70-90 percent of the value of the receivable when selling it to the factor, and the balance (less the discount, which represents the factor’s fee) when the factor collects the receivable.

There are two main types of factoring: full-service and spot factoring. With full-service factoring, the company sells all of its receivables to the factor, which performs many of the services of a credit manager, including credit checks, credit report analysis, and invoice and payment mailing and documentation.

With spot factoring, the business sells select invoices to the factor on a case-by-case basis, without any volume commitments. Since it requires more extensive controls, spot factoring tends to be more expensive than full-service factoring. Full recourse, non-recourse, notification and non-notification are other factoring variables.

Accounts Receivable (A/R) Financing: A/R financing is more similar to a bank loan than factoring is. Here, a business submits all of its invoices to the commercial finance company, which establishes a borrowing base against which the company can borrow money. The qualified receivables serve as collateral for the loan.

The borrowing base is usually 70-90 percent of the value of the qualified receivables. To be qualified, a receivable must be less than 90 days old and the underlying business must be deemed creditworthy by the finance company, among other criteria. The finance company will charge a collateral management fee (usually 1 to 2 percent of the outstanding amount) and assess interest on the amount of money borrowed.

Asset-Based Lending: This is similar to A/R financing except that the loan is secured by business assets other than A/R, such as equipment, real estate and inventory. Unlike factoring, the business manages and collects its own receivables, submitting a monthly aging report to the finance company. Interest is charged on the amount of money borrowed and certain fees are also assessed by the finance company.

Overcoming Fears and Objections

Some businesses shy away from alternative financing vehicles, due either to a lack of knowledge or understanding of them or because they believe such financing vehicles are too expensive.

However, alternative financing is not hard to understand-an experienced alternative lender can clearly explain how these techniques work and the pros and cons they may offer your company. As for cost, it’s really a matter of perspective: You have to ask whether alternative financing is too expensive compared to the alternatives?

If you’re in danger of running out of cash while you wait to get paid by large customers and you don’t qualify for a bank loan or line of credit, then the alternative could be bankruptcy. So while factoring does tend to be more expensive than bank financing, if this financing isn’t an option for you, then you must compare the cost to possibly going out of business.

Most business failures occur because the company lacked working capital, not because it didn’t have a good product or service. Unfortunately, this problem is currently magnified for many small businesses dealing with ever-longer payment terms from their large customers. Alternative financing is one possible solution to this common cash flow problem.

Why A Business Asset Based Loan Financing Is The Perfect Solution For Cash Flow In Canada

You are a Canadian business owner and financial manager looking for info and guidance on a business asset based loan. What is asset based loan financing, sometimes called cash flow factoring – how does it work, and why could it be the best solution for your firm’s working capital challenges.

Let’s cover off the basics and find out how you can benefit form this relatively speaking new form of asset financing in Canada.

A good start is to always understand and cover off some basics around what this type of financing is. Simply speaking the facility is a loan arrangement that is drawn down and repaid regularly based on your receivables, inventory, and, if required, equipment and real estate should your firm possess those assets also.

By collateralizing your assets you in effect create an ongoing borrowing base for all your assets – this feasibility then fluctuate on a daily basis based on invoices you generate, inventory you move, and cash you collect from customers. When you need more working capital you simply draw down on initial funds as covered under your asset base.

Your probably can already see the advantage, which is simply that if you have assets you have cash. Your receivables and inventory, as they grow, in effect provide you with unlimited financing.

Unlike a Canadian chartered bank financing your business asset based loan financing in effect has no cap. The alternative facility for this type of working capital financing is of course a Canadian chartered bank line of credit – that facility always comes with a cap and stringent requirements re your balance sheet and income statement quality and ratios, as well as performance covenants and personal guarantees and outside collateral. So there is a big difference in the non bank financing we have table for your consideration.

Your asset based lender works with you to manage the facility – and you are required to regularly report on your levels of A/R and inventory, which are the prime underpinnings of the financing.

Smaller firms use a particular subset of this financing, often called factoring or cash flow factoring. This specific type of financing is less transparent to your customers, as the cash flow factor might insist on verifying your invoices with customers, etc. A true asset based loan financing is usually transparent to your customers, which is the way you want it to be – You bill and collect our own invoices.

If our facility provides you with unlimited working capital then why have you potentially not heard of it and why aren’t your competitors using it. Our clients always can be forgiven for asking that question. The reality is that in the U.S. this type of financing is a multi billion dollar industry, it has gained traction in Canada, even more so after the financial meltdown of 2008. Some of Canada’s largest corporations use the financing. And if your firm has working capital assets anywhere from 250k and up you are a candidate. Larger facilities are of course in the many millions of dollars.

The Canadian asset based financing market is very fragmented and has a combo of U.S., international and Canadian asset finance lenders. They have varying appetites for deal size, how the facility works on a daily basis, and pricing, which can be competitive to banks or significantly higher.

Speak to a trusted, credible and experienced business financing advisor and determine if the advantages of business asset based loan financing work for your firm. They have the potential of accelerating cash flow, giving you cash all the time when you need it ( assuming you have assets ) and essentially liquefying and monetizing your current assets to provide constant cash flow, and that’s what its all about.