Authored by Phil Cohen
Running a business – especially in certain industries – can be a delicate dance between feast and famine. Some months your cash flow is surging like a river with Class-Five rapids, while other months it slows to a trickle – or dries up altogether.
Charted out, the peaks and valleys of an unpredictable cash flow look alarming (and they certainly can be frustrating), but such fluctuations really are normal for many industries. However, just because something’s normal doesn’t mean you can’t do something about it.
Factoring is a powerful way to maintain a stable cash flow through the highs and lows of running your business. When you sell your invoices to a factoring company, you get cash right away, which you can use for operations or whatever your business needs to keep running smoothly. Best of all, you don’t have to wait the 30, 60 or 90 days it may take for your customers to pay – you get access to capital immediately.
Here’s how to use factoring to manage stability for your business.
Understanding Cash Flow Variability
Cash flow fluctuations are the norm for many businesses, especially service-based and seasonal business. Retail, agriculture, staffing, and trucking are all businesses with cash flow variability, whether due to seasonal peaks or long payment cycles (or both).
Heightened demand in some months followed by slower periods in the off-season can cause a disconnect between your business’s sales and its accounts receivable, which can delay revenue and, in turn, the crucial spending or purchasing decisions that would otherwise keep your business moving forward.
Although fluctuations like these are often unavoidable, they can nonetheless cause financial strain and even affect your ability to cover crucial operational expenses like payroll. If that’s the case, you need a flexible but reliable way to access cash to keep things running.
How Factoring Smooths Your Cash Flow
Factoring lets you sell your invoices to a factoring company. In exchange for a small fee, the factoring company advances you the majority of the invoice value (say, 90%). You get cash right away, and the factoring company takes over collecting payment from customers. You get the rest of the invoice value when your customer pays, less factoring fees.
That means you don’t have to wait out the typical 30-day (or 60-day, or 90-day) waiting period to receive your income.
Stability in Slow Times
If your business has slow seasons, it can be more difficult to pay bills and meet other expenses when client payments are lagging. Factoring can provide instant cash for those invoices, so you get the capital you need to continue operations.
Opportunity in Busy Times
When business is booming, factoring can help you take advantage of opportunities to grow and expand. Need to hire more staff or invest in additional inventory? Factor your invoices for the cash you need to pay for them. You don’t have to miss out just because your clients haven’t paid up yet.
Consistent Liquidity
When you’re in an industry with peak and off-peak seasons, factoring can provide the liquidity you need to stay ahead of the curve (and ahead of your competitors). Regular factoring gives you a steady cash flow that you control without taking on additional debt. It can also help you forecast expenses better and provide a sustainable plan for the future.
Flexibility When You Need It
In addition to steady factoring, you can also choose spot factoring, where you factor select invoices as needed. This can help manage one-off cash flow challenges and supplement your regular factoring strategies.
Don’t Wait for Cash Flow Problems to Escalate
The best time to get started with factoring is before your cash flow situation is out of control. By working with a factoring broker, you can address potential problems ahead of time and ensure you have access to cash when you need it – not after the fact. This can help you reduce the stress of a feast-or-famine business cycle and keep operations running seamlessly.
The Bottom Line
For businesses weathering the ups-and-downs of unpredictable cash flow, factoring can be a welcome port in the storm. At Factor Finders, we’re here to help you find the right factoring company for your needs. Since we’re a factoring broker and not a factoring company ourselves, we can provide you with expert and objective guidance as you navigate the process.
Contact us to connect with a factoring company that can help you manage cash flow peaks and valleys and ensure long-term business stability.