Blog

There is a phenomenon where big fish eat smaller fish and so on down the food chain. Although we accept this as a fait accompliin nature, when it happens in business—when bigger firms squeeze medium-sized companies by delaying payments, and those medium-sized firms in turn cause cash flow problems for even smaller businesses, small vendors will start to cry “foul!”

These strong-arm tactics where large companies squeeze a smaller supplier’s cash flow can (and do) wreck havoc on daily operations. And in this day and age when there is plenty of uncertainty already in the markets, more aggravation is not what a small business needs.

If you recognize this dilemma, what options do you have to escape the vise? Is positive cash flow that is continuous, an achievable goal?

If you are a small business and are unable to secure financing through traditional lines of credit at banks, unlocking the value in your accounts receivables might be a worth a look. By working with a factoring company, you can instantly receive a big portion of your receivables as cash upfront. You can then reinvest  this cash in your business and grow it faster. You can KNOW that you can make your payroll and not worry about an account paying a couple of days late.

What are the key factors to take into account in selecting a factoring firm?

The following points are key considerations:

1. Look for a firm that does not demand monthly minimums. A factoring firm that is straight with you and lets you only factor the amount of invoices needed to maintain positive cash flow projections, will save you plenty in future fees.

To illustrate: Let’s say one factoring company charges a 2% fee per month and requires you to factor at least $100K per month. Another factoring firm charges 2.5% per month but requires no minimums. Depending upon your average cash requirement, you could be better off with one or the other, as shown below.

Bottom-line, try and estimate how much funding you will need to decide what option may be best for you.

2. Seek out a factoring firm that offers flexibility, and does not lock you into a contract. You should be able to leave the business relationship if you are not happy with customer service or if you find hidden fees. By offering an arrangement without “handcuffs,” you can be sure that factoring firm seeks a mutually profitable relationship and stays on its toes to provide the best possible customer service.

3. Ask about upfront fees. There should not be any upfront fees just to evaluate your situation. Most stand-up companies might charge a nominal due diligence fee which is due either when you accept the proposal or at first funding. There should be one simple charge, nothing else should be hidden.

4. Be wary of companies that advertise really low factoring fees such as 0.5% or 1%. Don’t take advertised rates at face value without asking questions. Additionally, know the expected duration for which your invoices will be outstanding as a rate itself means nothing without a stated timeframe.

For example, a company may offer rates of 1% for 10 days’ duration but may advertise ‘Just 1%’. Another company might have a 2% rate for 30 days. If your invoices pay in 30 days, the second company is the better alternative.

A factoring firm that tailors their offering to your particular needs, is absolutely paramount. Utilizing a factoring firm which partners with you, will enable your small business to escape the cash flow squeeze and help you sleep better at night.