If you’re a small business owner, nobody needs to tell you how challenging it is to deal with cash flow issues. Sporadic revenue and erratic expenses are all too common, especially for startups, and research from JPMorgan Chase and Co. indicates that businesses that don’t find ways to overcome them are most at-risk for failure.
All Companies Experience Speed Bumps
It may go without saying, but all businesses will face speed bumps of some sort: slow-paying customers, unexpected expenses, or the erratic timing of either can spell out trouble.
Small Businesses and Startups Struggle the Most
Although all companies have speed bumps, companies which make it through the first few years tend to see their sporadic revenues and erratic expenses level out as the years go by. In other words, if you can make it through the first few challenging years, you’re more likely to thrive in the long run.
Companies Which Thrive Regulate Their Cash Flow
JPMorgan broke companies into seven groups based upon their cash flow patterns and then evaluated which groups survived their fourth year.
Companies with regular patterns exit the market less often.
Just between 3 and 7 percent of businesses with regular cash flow patterns leave the market in year four when they’ve had regular cash flow patterns in year three.
- Regular Weekly- 3%
- Regular Weekly + Financing- 5%
- Semimonthly- 7%
- Semimonthly + Financing- 7%
Companies with less regular patterns exit the market more often.
Businesses which experience troublesome cash flow issues in their third year are far more likely to exit during their fourth year.
- Sporadic Revenues- 13%
- Erratic Timing- 14%
- Volatile Expenses- 21%
Banks May Not Help You Regulate Your Cash Flow
In short, if your business is going to survive, you must find a way to help minimize the bumps. As the research indicates, that means keeping cash flow regular and having the ability to cope with expenses as they come up. At the same time, all businesses have slow periods and eliminating customer-friendly payment terms is not always a viable solution. Many small businesses turn to bank loans and lines of credit as a solution, but despite approvals hitting “new heights,” Forbes Magazine notes that big banks are still only granting 25.9% of the funding requests they receive. Small businesses, especially startups, remain underserved.
Factoring Eliminates the Speed Bumps
Invoice factoring involves selling your invoices to a third-party, known as a factoring company. Your factoring company advances you a large portion of the value of the invoices, which can reach up to 90-percent. From there, the factoring company handles the full invoicing and collections process while you focus on the core duties of your business. Once the customers pay their invoices, the factoring company pays you the remaining cash, minus a small fee for the service.
It’s easier for businesses to qualify for invoice factoring.
More companies qualify for factoring because the business’ credit isn’t under scrutiny like it is with traditional bank loans. Instead, the factoring company examines the credit of the business which owes money (the debtor) — the customer paying on the invoice.
You choose when and how much to factor.
While companies with sporadic revenues will likely want cash injections on a regular basis to normalize cash flow, those with erratic expenses may only want cash injections when an unexpected bill creeps up. Invoice factoring works in both cases because you choose when to factor and which invoices to factor.
There is no debt to pay back with factoring.
Unlike loans which can tie you into a never-ending cycle of debt, you don’t pay money back when invoices are factored. It’s a debt-free solution.
Factoring is more affordable than you might think.
Most sources which discuss negatives associated with factoring highlight the costs. While it is true that factoring typically costs more than bank loans, it fills the gap for business which don’t qualify for them. Furthermore, it provides value-added services, such as managing your invoicing and collections processes. For these reasons, it’s totally within your power to factor when it makes financial sense to do so and handle your own invoicing when your company is stable without it.
Start Eliminating Your Speed Bumps Today
If you want to learn more about invoice factoring or would like to see what rates you qualify for, we can help. As North America’s leading invoice factoring company, Interstate Capital empowers businesses just like yours eliminate their speed bumps and regulate cash flow every day. Get started with a free rate quote.