Every dealership owner knows that cash is the oxygen of their operations. If short term expenses exceed the cash available to meet these obligations, even for a brief interlude, it could be the beginning of the end. Sometimes the cause of such a financial crunch is insufficient revenue, but that’s not always the case—especially in the auto industry where payment for goods and services can drag on for months. Whether a business is just starting up, or has been around for a long time and is just experiencing costs associated with a period of growth, additional temporary funding may be necessary.
Many of the original equipment manufacturers (OEMs) and tier one suppliers in the manufacturing sector are notorious for holding out on their payments. Their stated payment terms are typically between 45-60 days, however many of the larger OEMs will strategically drag out their payments for 75 to 90 days or more, which can place a significant strain on the cash flow of small and medium sized businesses. Smaller customers may also take longer to make payments in today’s market, all of which can be further compounded by immediate expenses being incurred within the business.
In most business models, when sales are growing, cash flow and profits are correlative. But with service-based industries that rely on labor and expertise, business owners have a weekly or bi-weekly payroll. It is crucial for business owners—especially owners of small- to medium-sized businesses—to align their cash-flows. Failure to do so can bleed out that business’s available cash. Although the operation may be profitable on the books, the business may be short of the cash needed to meet current obligations. Banks have less of an appetite for loaning money to business owners in this market, even when those owners have good credit and financials. That’s when a business may want to consider factoring as an option.
What does the factoring process look like?
Factoring provides a more flexible opportunity than the rigid loan options a bank would tender, offering up to 85% of the face value of a business’s receivables for credit-worthy customers typically within 24 hours, oftentimes even on the same day. A factoring businesses will assess the general viability of a business and determine if a potential client has a reasonable outlook of profitability. As long as the business has a strong base of credit-worthy customers, factoring institutions buy their invoices and provide them the liquidity they need to continue to fuel their business’s operations.
Unlike taking out a loan, which requires ongoing reporting to the bank to ensure you continue to meet their covenants (so they do not call the loan), factoring offers funding against invoices along with an active process of managing the ledgering and collections of your accounts receivable (AR).
Typically a small business owner doesn’t have a rigid collections process and is apprehensive about collecting their AR as they fear they are coming across as too aggressive to their customers. Factoring companies, on the other hand, can diligently make these calls directly to the business’s individual customers, and typically these simple follow-up calls are enough to expedite the payment.
So, when should a business owner know whether or not it is the right time to consider invoice factoring?
When a business is having issues with aligning their receivables with their payables and traditional banking and loan institutions have turned down their line-of-credit or loan requests or have capped the amount of credit they will extend, it may be time to consider other options.
Many business owners find themselves continually checking the mail, watching and hoping for incoming checks to meet their obligations, and often end up wasting time worrying and losing sleep. Factoring gives business owners control over the cash they need, when they need it, and allows them to focus on what they do best: running their business.
Rick Iacobelli is President of Liquid Capital Midwest Corp. He is a licensed Professional Engineer, MBA and IMT with 20 years of experience in a senior management capacity in Manufacturing and 18 years experience as a business owner. His experience spans financial services, technical services, operations with exposure to everything else that is involved with running your own businesses.