velocity of cash

The Velocity of Cash

It has often been said cash flow is the lifeline of any business and for a good reason. Having positive cash flow(immediate access to cash)allows businesses to maximize the opportunities at its disposal. These opportunities include paying bills, hiring new employees, investing in new technology and/or equipment, and going after new and larger accounts. Cash flow can also relieve a great deal of stress, often caused by not being able to address immediate or future needs of your business, most of which happen when a business is in a growth stage.

Have you ever encountered this scenario as your business is growing? Your sales are surging, but you struggle to keep pace paying your suppliers, employees and other bills. You are not alone; this is a problem many growing businesses encounter every day. It often happens because you are laying out more money while waiting for payments from your customers. This scenario creates a gap in your cash flow.

There are several solutions to address this problem and help companies smooth out their cash flow issues. These solutions include traditional sources of financing, non-traditional financing, and sometimes a combination of both.

Traditional financing options: The most common form of traditional financing is a line of credit, also known as senior debt, from a bank. Many companies look to set up a line of credit with their bank. If you are able to qualify for this type of debt, the company borrows a portion or all of the line, and pays back the debt over time. There is usually a debt repayment schedule associated with the line of credit. The line of credit has a maximum limit and is based on the credit of the business, business owner and assets of the business. Other types of traditional financing include outside investment, SBA type loans and family/friends.

Non-traditional financing options: These options include factoring (invoice financing), purchase order financing, and some short term loan options. Factoring is the selling of accounts receivable, or invoices, to a third party (factor) for cash. Factoring provides a way to fill the gap between when your company delivers a product or service and when your customer pays. This is a valuable option for companies with changing cash flow needs. If you company has products or services that it offers to credit worthy customers, then your business is a good candidate for factoring. The decision to fund invoices is based on the credit worthiness of your clients, not yours. Another option in non-traditional financing is purchase order financing. Purchase order financing is similar to factoring, except in this case, funds are used to pay your supplier(s) for products tied to a particular invoice. Again, the decision making process is based on the credit worthiness of your client, since your invoice to them is used as the collateral to pay your supplier(s).

Short term loans: Loans of 6-18 months are available to companies. Most of these types of loans, usually with a set daily or weekly payback amount, are based primarily on the sales and credit card transactions of your company. Typically, the underwriters look at the bank transactions of your company to determine the loan amount and pay back schedule. While these loans typically have higher interest rates associated with them, they can be used for a specific transaction.

Whether it is through a traditional or non-traditional solution, every company needs to find the answer that best meets their needs.

H David Rocker is Executive Vice President of Promotional Capital LLC, a factoring/finance company and a Universal Unilink preferred supplier. For more information or a complimentary working capital needs assessment please contact David at 216-595-6969 or drocker@promotionalcapital.com