Capital to keep your business working, early in the life of a business this is not always guaranteed. This is a stage when a client base is being established and long term relationships are in development.
The Small Business Development Corporation defines working capital as “the money needed to fund the normal, day to day operations of your business. It ensures you have enough cash to pay your debts and expenses as they fall due, particularly during your start-up period. Very few new businesses are profitable as soon as they open their doors. It takes time to reach your breakeven point and start making a profit.
The SBDC says “the working capital cycle measures the time between paying for goods supplied to you and the final receipt of cash to you from their sale. It is desirable to keep the cycle as short as possible as it increases the effectiveness of working capital.
The SBDC describes the working capital cycle as follows—
“It is made up of four core components:
- Cash (funds available)
- Creditors (accounts payable)
- Inventory (stock on hand)
- Debtors (accounts receivable)
The key to successful cash management is to be in control of each step in the cycle. If you can quickly convert your trading operations into available cash, you will be increasing the liquidity in your business and will be less reliant on cash from customers, extended terms from suppliers, overdrafts, and loans.”
The key is “quickly convert your trading operations into available cash”, however this is not always possible for any number of reasons. When you need working capital to buy materials to produce your goods it is even more critical to have a regular source of capital.
Venture capital could provide the required funds but are you prepared to give up equity in your business at this stage? It could bring more trouble than it is worth.
Factoring on the other hand, does not put a business into a debt situation nor does it require equity in your business.
A Factor will do its homework in assessing your business but they also take into account the strength of your client base, your debtors.
A Factor is also more flexible and less restrictive in providing the required finance. The finance is actually coming from the money your business has generated, a percentage of the invoices you have issued to your debtors.
Sounds simple? Essentially it is.
A Factor is also a good gauge of the credit status of your customers, as it is their business to do so. If a Factor will not accept the invoice of one of your clients, it is time to think hard whether they should remain one of your clients.
Fewer outstanding invoices and more cash, there is your capital to keep working.