Most businesses rely on a steady cash flow to be able to meet payroll and cover operational expenses. There may be times when a lull in cash flow can create serious problems. A seasonal business, one that is in the process of expanding, or one that is struggling to remain open may experience the issue more than once.
A few proactive steps may be the answer to alleviating cash flow problems. Business owners can apply for a revolving line of credit with a bank, credit union, or the Small Business Association (SBA). That means the money is always available when it is needed. Compare interest rates and terms before selecting an institution with which to conduct business.
Negotiating credit terms with suppliers is another possible step. Many suppliers and distributors will allow net 30 or net 60 invoice terms for businesses. That means the owner has one or two months before their invoices are due. The purpose of that arrangement is to give businesses time to collect balances from their customers before they have to cover those particular expenses.
One of the most common reasons for reduced cash flow is utilizing capital to purchase machinery, equipment, or vehicles for the business. Those purchases become assets and are subject to taxes. Renting machinery and leasing company vehicles will keep some capital in reserve. Another advantage is that those costs are considered business expenses and are tax deductible.
This process is used to get fast cash without a long application process or added interest rates. Private lenders or established factoring companies will purchase business invoices for a percentage of the face value. The owner will receive eighty to ninety-five percent of the value right away.
When the invoice is paid in full, the lender will take an agreed upon percentage as a fee. This is typically one to three percent of the total invoice amount. If any money is left over after the fee, the lender returns that to the business owner.
There are several types of factoring available. Owners will want to explore all the factoring options to select one that best suits the business needs.