“If you build a better mousetrap,” Ralph Waldo Emerson famously wrote, “the world will beat a path to your door.” But just because they want your mousetrap doesn’t mean they can afford it, and just because they can afford it doesn’t mean they’ll pay on time. Thus, you can produce the highest-value goods and provide sterling customer service, and still go broke.
You need your cash, not just to keep score, but to re-invest in your business so you can honor your contracts and promises. A cash flow crisis is not just embarrassing. It can be fatal to your small business even if sales are strong. In fact, strong sales sometimes cause cash flow crises. You might land a large breakthrough order from the government or a major corporation, then find that you don’t have enough cash in the bank to produce and deliver it.
If you increase spending on the front end of a large order, you’re depleting cash on hand. Your widgets don’t build themselves. Even if you’re excited about large new orders, you can’t spend euphoria. Your suppliers will require payment in U.S. currency. Your freight brokers will demand payment in advance. Without cash, your business can dissolve in humiliating insolvency.
You’ve got to make payroll, pay utilities and leases, keep your technology turned on, and pay your suppliers and distribution. If you run out of cash for any one of those, you’re done. Even if you escape immediate disaster, your system will be disrupted. Your procedures will become more chaotic and random as you scramble to respond to various cash flow crises.
Therefore, you’ve got to take accounts receivable invoices seriously. Don’t delude yourself if a customer is unreliable and might pay your invoices late, or if a large order is going to deplete cash on hand. Be financially proactive – have a plan!
Start with a cash flow statement. The Service Corps of Retired Executives (SCORE) website has a sample template for a 12-month Cash Flow Statement.
What Can You Do When Invoices Aren't Paid On Time?
You might defer maintenance or sell off some warehouse inventory for cash. You can offer discounts to other customers for prompt or accelerated payment, but there are problems with that approach. Customers get used to your discounted prices, and expect your product at discount even after your cash flow emergency is over.
You can approach outside investors for a cash infusion, but they often want equity in your business – they want to be co-owners, not just lenders.
In happier times, friendly bankers would extend a line of credit for you to tap when business circumstances required quick cash infusions. The tedious paperwork and intrusive questions were worth it. But many banks have grown tighter and more cautious since the onset of the recent recession. They might feel safe offering a line of credit to Tesla or Ford Motors, but not to your small business. And in fairness to the banks, perhaps your business credit has been damaged during the recession.
Download Our Invoice Factoring Application
In that case, the best option for small businesses may be factoring your invoices. Your credit is a matter of indifference to the accounts-receivable financing company. They evaluate your billed customer’s credit history, not yours, and when deciding whether to approve the deal.
The accounts-receivable financing company, also known as a “factor,” advances 70-90 percent of the invoice amount, often within 24-48 hours, and assumes the burden of billing and collecting from your customer. The process is especially quick at Meridian PO Finance, an accounts-receivable financing company that has posted a purchase order factoring application and an accounts receivable factoring application in .pdf on its website.
After your customer pays the invoice, the factor pays the balance to you, minus a factoring (transaction) fee. Factoring invoices for small businesses has been especially popular in the construction, apparel, trucking and health care industries. It has been a way for small start-ups to finance their operations despite scanty credit.
Meridian P.O. Finance is willing to consider factoring creditworthy transactions between $10 thousand and $10 million. We answer the phones (619-616-7162) between 10am and 5pm (Pacific time zone) on weekdays.