The future is unpredictable as we have all just learned. Trying to predict the cashflow for a business starts with making a bunch of assumptions. Many times, I have heard business owners say, “I know I’ll get paid but it’s when that I’m worried about”. A business that Factors never has to say that.
When business owners no longer need to worry about cashflow they can focus on other stuff like growing sales, maximizing profits, and managing people. All three are just as vitally important. When there is a cashflow problem nothing else matters and quick decisions are forced. Often, they are bad ones and the results can be catastrophically expensive.
Large profitable businesses with proven cashflow have lenders chasing them. Newer, smaller, and challenged businesses have a hard time even getting a lenders attention. Unless there is real estate involved that is. If not then a lot of time can be wasted trying to convince lenders, chasing Angels, and dreaming about being on reality TV. All along they could have been Factoring and improving their business.
Many business owners think they only need to Factor once or twice and are unwilling to commit further. This is called Spot Factoring. It can be done but the fees, terms and conditions will reflect the higher risk involved. The best approach when Factoring is to commit to 6, 12 or even 24 months or as soon as the business becomes bankable.
So, the answer to “When to Factor” is when bank financing is not yet available, and it makes sense. If it is affordable and if there is a need for working capital, then a business should Factor. (Check out my article on Supplier Credit). If a business is new or less than successful, then selling equity is a bad idea. More businesses fail due to cashflow reasons than any other.
The answer to “How to Factor” is to be careful. Business owners need to understand what their goal is and to act accordingly. A Factor is like a non-equity partner and should be chosen carefully. The terms and conditions should be easy to understand and straightforward. The purpose of Factoring is quite simple, as a Bridge to Bankability.