Business Growth and Cash on Hand Part 1
Corporate America has succeeded in making small businesses throughout the country finance its operations for the first 90 days. I know this sounds like a conspiracy yarn – but think about it for a moment.
You provide a service for a large corporation – how does business protocol work? In most cases it goes like this.
First you agree to overall terms of engagement whereby the burden of delivery is borne by you with terms and conditions skewed heavily in favor of the corporation.
Next, you bid on a proposal requiring significant costs in labor, material and management.
You win the bid and endure the cash outlay required to satisfy the scope of work.
You bill for your product only upon completion and subject to the corporation’s detailed scrutiny. Upon which, if you are successful –
Your invoice is approved for payment – which may occur in about 45 – 60 days.
Tally up the process and you just financed the 1st 90 days of a corporate rollout. Oh – but you are not done yet – not by a long shot. You can’t just satisfy this one contract – you have employees. If this project took them a month, then you better have enough cash on hand for four months of expenses. Why? Well, you paid for the 1st month; you have two months to kill before getting a payment and you need to be underway on the fourth month’s project when the payment arrives.
So, if you are billing out at a rate of $500,000 per month, you need $2M in cash reserves – MINIMUM.
That’s a lot of cash. This is the minimum cash RATIO confronting most small businesses, and if you come up short, well - you are not alone.
And if you do come up short – the ability to grow is almost impossible. However, there are alternatives.
Below, are four ways to augment needed cash on hand.
Find a Financial Partner or Investor. The upside of this arrangement provides cash and does not require payment until invoices are paid. The downside is you have given up profits and you probably have a boss.
Secure a Bank Line of Credit. The upside is a limited amount of cash available when you need it at a very reasonable cost. The downside is you will need to service the debt monthly and the credit facility will probably not grow with you. Also, very few applicants qualify for a bank LOC.
An SBA 7A loan. The upside is capital at a reasonable interest rate. The downside is –
No revolving capability,
an inflexible loan repayment structure,
and a difficult process to grow with company needs.
Factoring. The upside is immediate cash for invoices submitted, the credit facility is a revolving credit source, funding growth parallels business growth. The downside is the expense rate can be greater than a bank loan.
US Invoice Funding is a Factoring Company. We believe factoring is the best alternative to supplement your cash on hand. Let us show you why – Check out Part 2 of this series.
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