Cash flow for the cash poor

Cash flow for the cash poor

Cash flow for the cash poor

Sam has a problem a good problem, perhaps, but a problem just the same. He has been contacted by a well known company that would like to place a large order with Sam's company. This is the type of order that he dreams about, with the potential to double his profits from the prior year. Yes, he will be raking in the cash soon.

There are just a couple of not-so-small issues. He needs to order the materials to create the products and then needs to hire more employees to put the products together, box them up, and ship them out. He doesn't have enough cash to do everything, and his bank certainly won't loan him the money. Since most of his employees live paycheck to paycheck, he can't delay paying them.

If Sam has enough cash to buy the materials but not meet an elevated payroll level, he can solve the problem with Factoring. With factoring, which is also known as accounts receivable financing or invoice factoring, Sam can easily make payroll.

Instead of having to wait for his wonderful, new customer to pay him in 30-45 days, factoring puts cash in Sam's pocket right away. For instance, if Sam is billing out $100K, the factoring company will typically advance him $80K of that amount within 24 hours of him sending out his invoice. He receives the other $20K, minus the small fee for factoring services, when the new customer actually pays his bill. Sam can continue with the factoring as long as he needs. Because this is not a loan, he does not have to pay anything back.

So, factoring is simply accounts receivable financing that allows a business to address short-term cash flow issues. There are several forms of factoring, but the most common are business factoring (for commercial working capital finance) and medical factoring (for clinics, durable equipment manufacturers, etc. who bill insurance companies or government agencies like MediCare and Medicaid). Invoice factoring has been around for centuries, though it is not as well known as some other forms of financing in the U.S.

Alan Noblitt is the owner of Seascape Capital Inc and a commercial finance consultant who helps small and medium size businesses with business factoring, medical receivables factoring, and purchase order financing. He may be reached at (858) 672-4678 or toll-free at 1-800-634-4697. If you would like to learn more about the topics listed above, visit www.seascapecapital.com.

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