Sam has a thriving HR Outsourcing business with a staff of 40. The company provides technology solutions to some of the big names in the payroll processing industry. Business is booming and his company is on an expansion streak taking on new clients everyday. Unfortunately the companies cash position is not growing as fast as its top line sales growth and with the addition of each new customer the cash pressures become even more. There is a real chance he may literally grow his company out of business - sounds counter intuitive right?
Sam's situation is actually very common - he typically incurs significant setup costs in staffing and equipment costs when he signs on a new client, his projects typically take 4 weeks to setup and this is the first time he can submit an invoice to a clients - typically payable in 30 days but actually paid in 45 days. So the reality of Sam's collection cash cycle is, he incurs significant expenses to start working on a client and it takes as much as 85 days to get his first payment for work performed. Of course as an ongoing business he has immediate short term cash needs, like paying his programmers every week while he waits 85 days to collect his cash. This problem is magnified every time he takes on a new client. Although requiring some advance may help the situation, there is very little appetite from customers' in that industry to pay advances - and Sam wants to stay competitive.
He approached a couple of banks, but they are reluctant to increase his line of credit although he has healthy margins. In this cash-strapped situation, there is still hope for Sam and his company - they can utilize an innovative financing method called Account Receivable Financing.
The silver lining in the cloud for the otherwise gloomy predicament that Sam finds himself is Account Receivable Financing. It is some times called Invoice Discounting, Spot factoring, Invoice factoring or other names. The principle is however all the same. Customer invoices are offered to specialty finance companies who purchase them at a discount (their fees range from 2.5% to 7%). Sam's company get most of their funds as soon as they invoice the client and finance company waits to receive the full invoice amount from his customers in 30 or 45 days time.
Sam can now resolve his negative cash flow situation by following the 5 easy steps...
1. Research and contact a factoring company to sell his invoices.
2. The firm will assess the credit worthiness of Sam's customer (s), with less emphasis on Sam's credit or that of his company.
3. If satisfied with its due diligence - mainly focused on the quality of invoices to be sold - Factoring finance company will require notification from Sam's customer - that the invoices are valid and customer agrees to redirect the full invoice payment to the funding firm when the invoice is due.
4. Sam receives immediate funding of discounted invoices after customer notification.
5. Sam's customers pays the full invoice amount to factoring company when the invoice is due in 30 days.
The best part is some can repeat this process whenever he needs financing - subsequent funding can be as quick as 24 hours instead of the typical 4-5days for the initial first time application.