Having strong and flexible cash flow is one of the most important aspects of growing and maintaining a strong business. Businesses in Canada and the US often turn to factoring companies, like Accutrac, to help them free up and manage their cash flow.
Why do some businesses struggle with cash flow?
It's not unusual for most businesses, at some time or another, to find that available cash within their business isn't keeping up with demand. Here are some common reasons why that happens:
- Your business sells to clients who demand payment terms of 30, 45 or 60 days, sometimes as much as 90 days. Often your business doesn't have the luxury of the same timelines for paying operating costs. For example: that's especially true with service industries where labour is a large portion of costs.
- You own a high growth company that must constantly feed cash back into production to fuel the growth.
- Your business is in startup phase and is still building its client base (and consistent revenue flow).
- Your business has experienced a financial setback, or is going through a transition.
How accounts receivable factoring helps
Factoring helps free up cash flow by providing businesses with financing based on their accounts receivable. Instead of waiting the 30 – 90 days for a client to pay an outstanding invoice, with factoring, a business gets its cash upfront while the factoring company waits for the customer to pay.
How is that different from getting financing from a bank? In the simplest terms, banks mainly look at history (your credit and financial history) when determining if a business qualifies for financing. A factoring company looks at your company's accounts receivable (ie: work for which you've just invoiced a client) to determine if you qualify for financing. The factoring company also bases that decision on the creditworthiness of your customer, not yours.
Because of this unique approach that a factoring company takes to financing, many businesses qualify for factoring that wouldn't otherwise qualify for financing from a bank.
How does freeing up cash flow help?
Aside from the peace of mind of not having to constantly worry about cash flow, factoring offers many benefits. Canadian and US businesses use factoring to free up cash flow to:
- fuel growth by filling more and larger orders for clients
- pay for payroll and operating expenses
- purchase or upgrade equipment
- take advantage of early payment or bulk purchase discounts