Staying ahead of your competition is an inherent goal of doing business. You can do this in many ways: come out with new products, take advantage of new technologies and use effective marketing techniques. All of these methods are familiar to any business owner. However, one seldom used method can give you a significant advantage over your competition - accounts receivable financing.
There are two primary types of accounts receivable financing: factoring and purchase order (PO) financing. Both of these methods leverage your accounts receivable to receive immediate funds, allowing your company to operate more efficiently. These methods allow you to receive capital when you need it, meaning you can keep operating while your competition is waiting for cash.
Ignore the Cash Gap
Invoicing is the way many companies do business. When a larger order is received, immediate capital is used to fulfill it. Once the products have been shipped, an invoice is sent to the customer and the business must then wait for payment. This method has become the standard for most industries. However, this method of receiving payment has one inherent flaw - the cash gap. A cash gap describes the amount of time between when capital is expended and payment is received.
A cash flow gap can be detrimental for any small or large business. It can be the difference of making payroll or not, and leaving employees unpaid due to payments not coming in on time. Other situations may leave vendors unpaid, and supplies stop coming in interfering with production. This is the reason many companies are using factoring companies to accelerate the cash flow gap.
Factoring is a method of financing that provides payment for invoices for products that have already been delivered. A factoring company will analyze the creditworthiness of your customer, not your company, and will provide approved customers with immediate payment for outstanding invoices, less a fee. Payment is typically received promptly as well, dramatically minimizing the cash gap. For example, 1st Commercial Credit, a company that offers accounts receivable financing, states that funding can be provided within 3-10 business days for businesses seeking funds for the first time. After the first transaction, funding can be provided within 24 hours.
Taking advantage of factoring can significantly out leverage your competitors by providing you with immediate capital. Imagine a situation in which you and your competitor receive a similarly sized order at the same time. The order is fulfilled, and doing so consumes the majority of both companies' working capital. Both companies are rendered unable to process similarly sized orders until payment is received. However, if you seek factoring, you will regain your capital within a week. Conversely, your competitor will have to wait 30, 60 or even 90 days before they can process anymore orders. During this time, you've processed three or four more orders, gained new customers and earned a significant profit.
Handle Larger Orders
PO financing is another form of accounts receivable financing that can provide a significant advantage over your competition. This type of financing is a variant of factoring that covers the other end of the order fulfillment process:- production.
When a business receives an order, they are typically able to fulfill it with on-hand capital. However, sometimes orders are received that are simply too large for their current capabilities. The order typically must be turned away. That is unless the company knows how to leverage PO financing to fulfill this order. A financing company will use the credit worthiness of the customer to provide up-front capital, or a line of credit, that will allow the business to fulfill an order typically outside of their capabilities. Using this method, you can fulfill orders of all sizes, regardless of your on-hand capital. Funds can be used to hire new employees, purchase new equipment or secure additional materials.
This method of financing can be used to significantly out leverage your competition. It allows you to fulfill orders that would otherwise be turned away. If your competition is not taking advantage of PO financing, they will be forced to lose out on business. They may even directly send customers to you!
Outpace and Outlast
Purchase order financing and factoring are two methods of financing that can provide you with a distinct advantage over your competition. While they are inhibited by the cash gap, you are processing new orders. While they are turning away large orders, you are gladly accepting them and earning a profit. Use these two methods and leave your competition in the dust!
Image provided by John Fischer from Flickr's Creative Commons
About the Author: Raul Esqueda is founder and CEO of 1st Commercial Credit, LLC out of Austin TX.- Raul has experience in funding businesses of all industries and sizes within the United States, United Kingdom and Canada and has written many articles about purchase order finance, factoring and asset based lending.