Even a business with strong sales can find itself facing a cash shortfall. Here are two solutions to this problem.
Imagine that you've just landed a big contract, and your production costs soar as a result. If you don't get paid until 60 days after delivery, you might find yourself short on cash. Now imagine that your business really takes off (we hope it does!) and you have no choice but to grow rapidly to keep up with demand. Would you have enough cash available to finance this growth?
In situations like these, there are two effective solutions that businesses can use to get the funds they need. The first is accounts receivable financing (factoring), and the second is accounts payable financing (reverse factoring). These solutions give businesses access to cash that they can then use for various things, including developing new products, attending trade fairs and paying off debts. Here's how they work.
Depending on the terms of the contract, your clients may have 60, 90 or even 180 days to pay their invoices. In the meantime, you'll have to buy raw materials and pay your employees and suppliers. Sometimes an operating line of credit isn't enough. The situation can be particularly difficult if most of your earnings come from just one or two clients. Payment timeframes can also be long if you do business with government bodies.
If this sounds familiar, there is a solution: the Bank's accounts receivable financing program. This gives you the funds you need to continue operating and finance your growth, with no need to wait for your clients to pay. Accounts receivable financing is particularly useful for a business that has signed a big deal that requires it to grow quickly to honour the contract. The business not only receives payment but also reduces the risk of the buyer defaulting. Another advantage of selling your accounts receivable is that the Bank will handle the sometimes delicate task of debt collection.
It can be a lengthy process from the drawing board to the production line, and it's even longer before the profits start coming in. Unfortunately, suppliers still need to be paid, and some businesses have to purchase large quantities of raw materials to take advantage of favourable price fluctuations.
In both these cases, businesses can find themselves facing serious cash flow problems. Accounts payable financing complements your conventional operating line of credit. The Bank pays your suppliers on your behalf upon delivery of the goods or services, and your business then has between 30 and 180 days to repay the Bank.
This method increases the loyalty of your strategic suppliers and lets you enjoy longer payment terms. You may also be able to benefit from or negotiate early payment discounts with your suppliers. All this can add up to a considerable edge over your competitors.
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