You need cash. You just landed the big account you've been working on, but don't have the funds needed to complete the service promised in the first place. Maybe you have payroll due in the next few days and are still awaiting payments from your customers. Regardless of the context, one thing is for certain: you're strapped for cash and the banks are refusing to give your business a loan. What can you do? In such circumstances, more and more small businesses are considering selling receivables to solve their cash-flow woes. Operating under the same philosophy as credit cards, factoring (or receivables financing) involves selling your receivables to a third party in return for upfront payment. Factoring companies will thus buy your receivables at a discount, usually between 75 to 80 cents per dollar, and in exchange give you the hard cash you so desperately need. As of late, this method has been gaining a lot of steam within the small business community, for its ability to produce quick results-regardless of a company's size, credit score or status. While certainly effective, it must be noted that this service does indeed come at a price. If not used properly, it can lead to a pretty sticky mess for you and your small business. Start considering how selling receivables can help your business but also, how to do it wisely and efficiently.
Selling Receivables for Small Businesses: Is it Right For You?
WHY?
- Fast Cash - As senior financial analyst Mike Lubansky points out in Business Week, "In the past, some may have seen factoring, because of its higher cost, as associated with troubled situations. But now it's just another source of financing, especially for funding that businesses need to grow when banks that have tightened credit standards and are focused on preserving capital are not able to lend as much." In this light, selling receivables can be a great way to get the quick financing you need. In the words of Cindy Phillips, "Accounts receivable is the lifeblood of all business," but cash flow sometimes doesn't always function the way we have intended it. Bills come in at different times, payments are collected late, all in all, sometimes the cash isn't there at the exact moment when we need it. What we do have are receivables and by selling them we can get fast access to an immediate source of cash to use on urgent matters. In this way, your small business can get the money needed to, let's say, pay your employees, take on that new account or simply stay afloat when otherwise you wouldn't have been able to.
- Collection Agency Alternative - Selling your receivables can also we a good way to get rid of some of your delinquent accounts. While granted you won't be able to get all of your money back from the invoice, you could at least recover some of it through selling receivables to a third party. Remember that these factoring agencies make their price based on your customers' credit, size of accounts and time it takes your customers to pay, so chances are, with delinquent accounts, the fee will be a little higher.
HOW?
- Use Sparingly - As appealing as the prospect of immediate cash sounds, when selling receivables you must to be careful. It can often be the start of a slippery slope-especially when operating at already reduced profit margins. As Bill Hettinger, principal at the Institute for Finance and Entrepreneurship, warns, "Once you start factoring, it's a difficult process to break. The key to a factoring or discounting decision is a complete analysis of all the financial implications of the decision. It's more complicated to analyze than a bank loan." Selling receivables comes at a price and you must weigh the costs inherent when making the decision. There is something to say about receiving money upfront, but you must also remember that by selling receivables you are also eating away your profits. Therefore, only consider going the factoring route in cases of extreme urgency. Sometimes the discount can be so great that you will end up selling receivables for less money than it actually costs you to perform in the first place. Making a habit of this could eventually get you into financial trouble.
- Do Your Homework - Just like trying to find a debt collection lawyer, when choosing whom to sell your receivables to, make sure to do your homework. Sometimes it isn't as simple as who is going to give you the best price. When it comes to selling receivables there is a little more at stake then selling your beloved Jordan jersey on eBay. Remember, whoever buys your receivables thereby assumes control of that invoice, including the process of collecting payment from your customer. For this reason, you should do your research on the methods that particular company uses to collect money. Do they use a collection agency? Do they badger customers? Are they friendly to work with? Do they require you to only use their services? Is it through a broker? These are all important questions to consider when choosing who you sell to. Remember, they aren't just dealing with you but with your customers as well. Check references, talk to past clients, talk to your bank for recommendations, ask questions, anything you can to understand as much of their collections process as possible before you sell. The last thing you want is to hurt the relationships you have worked so hard build with your customers.
Have a problem with late paying customers? Want to improve your chances and get the money you actually deserve? Email one of our receivables coaches for FREE expert One-on-One advice at coaching@fundinggates.com or see how we can help at http://www.fundinggates.com/
Let's face it,
You deserve to get paid!
