Cash Flow Planning

Many small business owners struggle with how to best meet their cash flow needs on a daily basis and still maintain a focus on growth and profitability. Businesses that have commercial accounts and rely on payment from their customers on a timely basis almost always suffer from cash flow problems since many times the very customers they sell to have the same problem. Payroll and taxes have to be paid on time regardless of daily cash receipts which often places a great deal of strain on the business.

However, there are remedies to these everyday cash flow problems which will allow the business owner to meet daily cash outflow needs and still focus on growth and profitability. Each solution has differing factors that may or may not be the choice that is best suited for the business. Internal cash flow financing is probably the best choice since it allows for cost effectiveness and business growth. Businesses which are able to use this option, generally more established and have excellent relationships with their vendors and suppliers. Because of the standing relationship between the business and it’s suppliers, they are more apt to allow additional time and are willing to work with the business.

Line Of Credit

The local bank is another option available to the business owner. With an established line of credit with a bank, the business has access to cash to meet short term needs. However, the requirements and standards for an established line of credit are usually very high and in most cases require collateral in the form of property or accounts receivables and a high credit score on the part of the business owner. Again, this option is probably best suited for those businesses that are established. Having access to a line of credit with the local bank can come in very handy should ongoing jobs require more cash than anticipated. In some cases, the established line of credit may not be large enough or be too restrictive to be of any help with cash flow financing an needs.

Bank Based Accounts Receivables Funding

Another option available to small business owners is also through the local bank which is based on  the accounts receivables of the business. In it’s simplest form, the local bank in which the business owner has established an relationship, the bank will provide a loan for an individual invoice on the date the invoice was created. In this way, the business receives cash immediately and the bank waits for the customer to pay the invoice. Although the cost of these transactions are higher than what it would cost for a traditional line of credit, the requirements to qualify for a bank based accounts receivable financing are mush lower. Before utilizing this option, it is important the business make sure that the cost involved do not exceed profit margins.

Invoice Factoring

Invoice factoring is another option available to small business owners that are unable to qualify for a line of credit or a bank based account receivables program. These programs are usually offered by finance companies, not banks, which specialize in this type of cash flow financing. Collateral and business owner credit worthiness are not requirements since the risk is based solely on the credit worthiness of the customer  to whom the invoice is issued. The invoice factoring company will purchase the invoice from the business at a discount rate, usually around eighty percent of the total value. The invoice factoring company will then issue a check within a few days, supplying the business with much needed cash flow to meet their needs. Of course, your customer must first agree to signing off on the transaction from the factoring company. If the business has an established relationship with the customer, usually their will be no problems. The largest benefit to this type of transaction in cash flow financing, is there are no qualifications and credit worthiness expectations on the part of the business. Although more expensive, this option is usually a viable choice for newer businesses trying to build their credit and become established.

Cash flow is the life blood of any business. Without access to cash to fund daily requirements, payroll cannot be met, taxes cannot be paid and new jobs cannot be funded eliminating growth, new equipment cannot be purchased which hampers your ability to provide the service your customers expect. By considering the above options, you can gain access to the cash needed to make your business profitable and grow. Cash flow financing is something all business consider at some point. Choosing the method that best suits your business requires a bit of research on the part of the business owner, but in the end, almost always a solution can be found to cash flow financing problems.