There are financial tools to help bridge the cap in cash flow but tread lightly.
- Factoring – AR Financing
- You complete the work, invoice and get it approved and get a loan based on the invoice
- You get a % of the approved invoice upfront and they collect payment
- This costs money – fees range from 2% to 7% or more
- The pitfalls
- It sounds great at first, do the work and get paid
- It’s really a slippery slope that’s hard to stop
- Main problem is you are giving away profits in exchange for cash flow
- It has its moments
- Obviously if it’s an emergency then do it
- May be helpful when taxes are due and you didn’t manage properly
- Can be used with a slow pay client if you pad the interest into the estimate
- Can be helpful to clean up your AR at year end in preparation for bonding reviews
If you choose to use this tool, be careful and plan properly.
Is factoring the right solution for me?
Am I managing it properly?
Are there other alternatives?
Don’t factor – find alternative solutions if possible
If you must, have a plan and limit what you factor and for how long
Manage this financial tool as well as all others where you are giving up profits in interest charges