Every business requires cash to remain fully operational. This is a must, regardless of the size of the business. While most business owners have strategic plans in place for business expansion, marketing, and hiring talent, few of them have a well-thought out plan for obtaining the capital necessary to keep the doors open.
Business Failure and Cash Flow Management
There are numerous studies that indicate the percentages of businesses which fail during the first five years of operation due to a lack of financing. Undercapitalization can be problematic; you are unable to fulfill large customer orders, face difficulties hiring new staff members, and may be unable to pay your overhead costs. This does not have to be the case; having a plan in place to ensure your business finances remain healthy begins with a plan.
Developing a Strategic Plan
As a business owner, you have a general idea of what times of year you may have cash flow problems. This may be because you have already been in business a year or two, or simply because, as a startup owner, you have carefully evaluated the market and understand seasonality. Based on this information, you must make decisions about your financing to ensure your business continues to grow and thrive. This means developing a strong financial plan.
Identifying Realistic Goals
One of the first things you will have to consider is what goals you want to set. This part of your overall plan should include your plans for growing your business; this means you need to decide how many, and how large, your new clients will be, and whether you need new staff members to accommodate new customers.
Once you have identified your goals for growth, you should decide how you intend to finance the growth. Remember, new customers are a great addition to any business, but you must be able to fulfill their needs. This typically requires an influx of cash which means you will need to decide as to how to get access to cash.
Options that are available to small, and medium sized business owners are somewhat limited, and what you do not want is to have a lender dictating how you can utilize the funds you borrow. For some businesses, borrowing money can be challenging; particularly if you are facing a cash crisis, or a growth spurt.
Understanding Your Funding Options
Many businesses turn to traditional bank financing. This can create additional problems for your business because you are taking on debt. Debt tends to weaken your balance sheet, and you are now facing new monthly payments to repay that debt. This could exacerbate your cash flow problems. Additionally, if you need an immediate cash influx to meet the needs of a new customer, you could run out of time before the loan is approved.
Some entrepreneurs feel their best option is investing their own cash into the business. While this is an admirable position, this could put your personal financial status at risk; if you are unable to generate sufficient income to extract that investment from your business, you could face financial difficulties at home.
These are some of the reasons why more companies, particularly a company that is still growing, new to the market, or is facing seasonal slowdowns often turn to factoring for the cash they need to keep their business operational. There are a couple of different options available to companies when they elect to use their accounts receivable to secure the funding they need.
Advantages of Factoring
One of the best reasons to use your existing accounts receivable to obtain the cash you need is you do not incur any additional debt. Basically, you are getting an advance on money that is already owed to you. For some businesses, factoring their purchase orders may be a good option as well; this allows you to meet the needs of a new, or existing client without borrowing money and going into debt. Both invoice and purchase order factoring allow a business owner a great deal of flexibility. Some of the benefits include:
- Nearly immediate cash – factoring is faster than a bank loan; typically you can get the cash you need within a few business days.
- Terms to customers – you do not have to run a cash only business to have the capital you need. You can offer your customers extended credit terms.
- Accept larger orders – when you are facing an internal cash crush, you may not be able to take on larger customers and fulfill their needs; with factoring, you have the cash you need.
- Growth and competition – factoring allows you to grow your business and be competitive in your field.
Factoring should be a part of your strategic plan to both grow your business and have the capital you need to expand your business. Capstone Capital Group is here to help businesses who are ready to learn about the various ways they can finance their business needs. For more information on Capstone, please call us at (212) 755-3636 to speak with a representative today.