March 16th, 2013

Manufacturing. Wholesale. Transport. Services. You can take a look right across a broad spread of sectors and business types, and you’ll always consistently find one factor that is common to the success of each and every one. All of them need one thing to be successful, to survive and to grow.

And of course that one thing is cash.

I’ve always made a point of driving home the fact that in small business, cash is king. And while it might not take a genius to come to that conclusion, isn’t it funny how when you run a business, it often seems almost impossible to get your hands on the cash you’re owed by customers at the time it’s actually due?

Needless to say, your best source of cash is simply collecting your accounts receivable. Yet isn’t it surprising how those customers that you get along so well seem to take on something of a Jekyll and Hyde approach to paying? On one hand they’re a pleasure to work with, on the other, they seem quite comfortable stringing you out past 30, into 60 and maybe even 90 days before handing over what they owe. Never mind how it hurts your feelings, because we both know that it hurts your business far worse. If you find that just managing and organising your business can be tricky at the best of times, managing your cash flow when customers don’t pay on time makes the job far more difficult and stressful. It’s very difficult to grow and improve your business when all you can think about is how you’re going make payroll! So let’s look at some options for improving business cash flow.

Payroll Financing – you can’t always depend on the banks.

Borrowing money to make payroll goes against the grain, but it’s perhaps only natural that most business owners approach banks and other lending institutions first for help with supplementing cash flow. After all, these are the avenues that society has traditionally taken when it comes to sourcing money solutions. They maintain a high profile, and thus they are often the first port of call. But they’re not always the best.

In tough economic times like the ones we’re living through right now, you might be surprised just how difficult it can be to obtain ‘good old-fashioned’ bank financing. Banks – especially the big ones – are slow-moving and conservative by nature. Plenty of Australian small business operators who’ve been loyal to their bank for years have been unpleasantly surprised at just how unaccommodating banks can be when a business is in a tight spot.

The good news is that when the banks won’t step up, there are choices available to help with payroll financing, and they are by no means the ‘poor relations’ when compared to the banks. In fact they offer flexibility and advantages that, frankly, make the banks look pretty average.

Let’s consider working with a factoring company. Factoring itself is remarkably simple. As a business, you sell your credit worthy receivables to a factoring company. Invoices are sold at a specific advance rate, typically around 80%. So your business is advanced 80% of the value of the invoice usually within a matter of days, and when the invoice is paid, you also receive the remaining 20%, less the fees of the factoring company.

Notice how you didn’t see the words ‘borrow’ or ‘lend’ anywhere in the previous paragraph? Factoring isn’t a loan, after all, it’s simply an advance on money that’s owed to you. So factoring can solve your payroll problems without the need to borrow money.

Some facts about factoring;

  • Setting up a factoring line is easy, and usually doesn’t take long to establish
  • Because factoring is seen as short-term financing, there’s no need to be indebted to a lending institution such as a bank for an extended period.

Tips to take on board before you get started;

  • While it’s not absolutely mandatory that you factor all of your receivables, doing so definitely has big advantages for business, boosting cash flow, bringing peace of mind and helping business organisation.
  • Before you even get started factoring, stop giving ‘quick pay discounts’ to your customers! Factoring means you’ll get your hands on the cash you need without having to offer a discount at all, and of course some customers will take advantage of any discount offered…and still break the rules when the time comes to pay.

Of course you don’t have to be facing a payroll crisis to consider working with a factoring company. Factoring can make all the difference when it comes to accessing cash to build your business, too. It can help you to plan more effectively, or it can simply give you a break from the cash flow rollercoaster, and let you enjoy some peace of mind, instead of holding your breath and waiting for payment. Business, after all, is meant to be a challenge – but an enjoyable one!

Wishing you all the best for your week in business,

If you'd like to learn how Earlypay's Invoice Finance & Equipment Finance can help you boost your working capital to fund growth or keep on top of day-to-day operations of your business, contact Earlypay's helpful team today on 1300 760 205, visit our sign-up form or contact [email protected].