There are financial tools to help bridge the cap in cash flow but tread lightly.
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- 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.
Key Questions:
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Is factoring the right solution for me?
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Am I managing it properly?
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Are there other alternatives?
Take-Action Items:
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Don’t factor – find alternative solutions if possible
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If you must, have a plan and limit what you factor and for how long
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Manage this financial tool as well as all others where you are giving up profits in interest charges