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Three Ways to Approach Cash Flow Financing

Finance

There is a lot of online chatter regarding methods to increase cash flow in your business. Most of the time, these folks are talking about indirect ways to affect your bottom-line cash flow positively by increasing your top-line revenues. Spend more in marketing and sales, refine your product/service offering and the rest will take care of itself! Well … that isn’t the worst advice, but you may need some extra cash today to make these types of investments in your business, ultimately increasing top-line revenues.

Where do you start? Start by looking at the cash flow you have right now. If you don’t have great cash flow, you can increase that by employing cash flow financing tools. These are tools that you use to accelerate cash flow that normally wouldn’t show up for 30 to 90 days.

Access extra cash for your business ASAP by using one or two of these three simple cash flow financing tools:

  1. Factoring – this type of cash flow financing is well understood in many industries and often overlooked in others, mainly due to a lack of education. Invoice factoring is the simple process of selling your accounts receivable (or outstanding invoices) to a company in exchange for an advance of cash today (typically 80% of the invoice amount), rather than having to wait 30 to 90 days for your customers to pay.
  2. Offer discounts to your customers – You’ve probably seen a note on the bottom of invoices that says if you pay early, you get a discount. Try to make an aggressive practice of this tactic with your own customers. Who doesn’t want to save a little money?  If you can get to the right person in your customer’s organization, explain that you are seeking to make some great investments in your own company and are trying to bring some cash forward. You might consider offering even more than the 2% discount typically offered.  The response level to this tool is often surprising.
  3. Delay payment to your own vendors – I think this option should be used as a last resort. The mechanics work the same for you as you hold onto your cash longer, and use that cash for anything you’d like. However, you’ve probably experienced this pain yourself with slow-paying customers. It adds a level of unwanted stress on your vendor that may have serious implications if they think they may not ultimately get paid. The longer you hang someone out there, the more nervous they will get.

I’ve listed these three options above in order of preference because I think each of these has implications to how your business will operate and be viewed by others – your customers, employees and consultants or vendors.

The first cash flow financing tool I suggest, factoring, is a well-established financial solution many small businesses employ. Also called accounts receivable finance, this option lets external parties know you have a “partner for growth” as your business scales.

The second tool of offering discounts to your customers may turn into a part-time job, depending on how many customers you have to contact to get the result you need. As you position the discounts to your customers, you should consider just how much inside financial information you want to share with them.

Third, and finally, stringing out your own vendors can get the job done, but really can leave a stench behind you that is tough to ignore. I wanted to specifically address this type of cash flow financing because many small businesses resort to this solution first, because they don’t think there are others to use, and sometimes it’s easy to hide from your vendors.

Try #1 or #2 above the next time you need to accelerate your cash flow. I think you’ll be pleased with the result!

Want to learn more about accounts receivables financing and how consistent cash flow benefits your business? Contact a cash flow consultant now!

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  1. I agree that the first place to start is to look at your cash flow. A great way to do this is setting up a Cash Flow Projection in excel. This will not only track what your current cash flow is, but also plan what the revenue and expenses will be 6 to 12 months down the road.

  2. Excellent suggestion, Kirsten. Forecasting cash flow will not only give you the “real” story, but it can allow you to sleep better once you know what’s going on. Even if you see a cash flow squeeze coming in the future, you can find financial products like invoice factoring to smooth out your cash flow. The biggest problem arises when business owners get surprised and end up in a big cash flow hole. Spending the time to build a forecast and then update and manage it on a regular basis is just solid business advice.

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