Liquidity And How To Improve The Balance Sheet

It is always a challenge to show the health of a business on a balance sheet

. One way is to convert accounts receivable into cash. It is essential to have enough cash on hand to operate a business efficiently. This includes being able to make payroll, accounts payable and other expense payments on time.

When a business is unable to borrow adequate funds to operate at optimum efficiency, a viable alternative is to factor invoices. Invoice financing or factoring dates back four thousand years. Clothing and textile industries have used factoring for many years. However, since the 1980's, more companies that submit business to business invoices have found factoring to resolve cash flow issues on a transitional and time sensitive basis until the company is able to qualify for conventional financing.

Even though alternative financing is more expensive than conventional bank loans or line of credit, companies can often benefit from being able to spend more time doing what they do best rather than in applying for loans or additional financing on lines of credit.

When a business accepts credit cards, they transfer the risk of collecting on the accounts to the credit card company. It also allows a business to get more business as a result of having a credit option for more business.

Factoring is a process similar to accepting credit cards. One of the main differences is the factor pays in two installments rather than one. The first installment is called an advance. The remainder or reserve is paid after the client has paid the invoice. At that time, the factoring company takes out a small percentage known as a discount fee. Therefore, the business is selling invoices at a discount in the same way credit card companies do.

Factoring is also possible even though a business has a bank loan or line of credit. In order to factor, the bank is asked to subordinate to the factor. Factors usually specialize in certain types of accounts. Some will factor only third party medical receivables. Others will factor just about any type of business to business or business to government invoice. Some will specialize in factoring construction. It is important to find a reputable broker to match your business with the right factor.

There are two ways to lease equipment. The first involves ownership upon termination of the lease. The second involves returning the equipment. In some cases, it is more desirable for a company to return the equipment because the lease payments made on a monthly basis are lower. This allows them to get into another lease on newer equipment and sooner.

Some companies try to solve some of their cash flow issues by offering an early-pay discount to their clients. The cost of factoring can be offset by discontinuing early-pay discounts. However, the company can benefit from early-pay discounts offered to them by their suppliers as mentioned above. That also is a way to offset the cost of factoring.

There are no strings attached to the funds to the business can use the money as deemed wisely. The only exception is if there are tax liens. In those cases, the business would have to take care of those liens before spending on other bills.

The number one reason a business goes out of business is the lack of financing. It has to be a priority to turn negative cash flow into positive cash flow. Business owners must know when and whether their cash flow is problematic. If a business needs to improve cash flow, factoring or leasing should be a consideration. One should contact, consult with a broker and consider alternative financing when it is not possible for the company to get conventional financing.

by: Russell Wardle

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