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Business Is So Good It’s Killing Me

A call came into our office last week from a stressed-out small business owner in Florida. He said that he needed a business plan right away that he could submit to a bank for a loan to fuel the growth of his commercial landscaping business.

Cash Flow Management With Factoring

One of our consultants asked him to provide some details and this is what we learned:

  • Business is great. He has about 80 commercial accounts, mostly multi-family and office properties. In most instances, his customers are property managers. New business opportunities seem to come in every week.
  • He is running 3 crews and is about to add a fourth. He has 4 trucks and trailers and he can’t really add to his schedule without adding more workers and vehicles.
  • He asked, “how can business be so good and I never have any cash?”
  • He sends a crew to each customer site on a specific day, once a month.
  • He invoices each account at the end of every month and his receivables average about 50 days.
  • He pays his crews weekly and has 4 truck payments to make each month along with rent for his office and other operating expenses such as insurance and utilities.

We told him that he didn’t need a business plan and he didn’t need a bank loan. Our consultant recommended that he take two actions immediately, and that if he did so, his cash flow problem would be solved within a month.

First, we told him to have two billing cycles instead of one. He should bill half of his accounts on the 15th of each month and continue to invoice the balance of the accounts at the end of the month.

Secondly, we told him that he needed to contact an accounts receivable factoring provider immediately. A factor is a finance company or other type of commercial lender that will “factor” or essentially lend you 70% to 80% of the amount of each invoice the day after the invoice has been created. When the customer pays the invoice, he usually pays it to the factor without even knowing it. After charging a fee (2-6%), the remaining balance is released upon full receipt of payment for all the receivables/invoices. This activity is almost always done online.

Many business people think of factoring as a very expensive form of financing, and it can be if it is not used properly. However, factoring allows your business to make those larger sales and still have the working capital to continue operations and further growth. The most important thing is to not let those receivables get too old. Just because the factor is getting you your money faster doesn’t mean you don’t have to manage your customers and let them know that you expect them to pay their invoices within the agreed terms.

The best thing about factoring is that a factoring line of credit can be set up very quickly, usually within a few days. You need to fill out an application and provide a list of all of your customers including their name, office address, telephone, email, and website address. The factor will advance funds to you based not on your credit rating but rather on the credit rating of your customers. This is very important when you have a lot of other debt like truck loans.

So, where do you find a factor? It’s simple, just search online for “accounts receivable factor.” There are hundreds if not thousands of them. Some are local outfits right in your area and some are national lenders. Shop around and be sure to find the one that, in your assessment, will provide the right combination of customer support and price. And remember, factoring can be a terrific solution to your cash flow problems.

Jimmy's background includes over 40 years in international, commercial, and investment banking, and nearly a decade as the principal shareholder and CEO of a rapidly growing manufacturing and distribution business in California. Today, Jimmy spends his time advising and consulting with entrepreneurs on matters related to business planning, as well as capital markets and funding strategies. Jimmy works with clients throughout the world in industries that include financial services, real estate, manufacturing and hospitality. View details.

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