By Capstone Capital Group, LLC
The economic challenges of the COVID-19 pandemic have left a cash flow shortfall for many firms. With an impaired balance sheet as a result of equity being eaten away by tighter operating margins, the rising cost of materials and labor, and the inability to pass on the additional costs means that bank financing is almost impossible to get. If you are lucky enough to have a bank line, the terms and conditions may have changed as new regulations have the potential to shift the profile for your relationship with the bank from a strong personal relationship into a loan that is categorized as ‘risky,’ thereby requiring the bank to increase its capital requirements. The ability to find and obtain needed financing to strengthen and grow businesses remains a true challenge and can either make or break a small or struggling business.
Business owners must ensure they have the cash flow to make payroll, pay benefits, manage and collect accounts receivable, manage and pay suppliers, and find work to backlog. These demands create an almost perpetual cycle of cash flow deficiency for a business.
Taking Control & Keep Up with Factoring
Invoice factoring is an effective strategy to help companies obtain the funding they need when traditional sources, such as banks and finance companies, are not available or willing to help. The company sells its outstanding invoices for services the company has already provided, only if it needs the additional cash flow for operations.
Companies are then able to sell a single invoice or a schedule of invoices in exchange for much-needed working capital. Those funds provide staying power until cash flow catches up with expenses. Invoice factors typically work with construction-related companies including electrical subcontractors, drywall subcontractors, mold remediation firms, and demolition companies.
Meet Extended Payment Terms & Grow Business
In today’s competitive market place, the ability to offer extended terms is crucial to winning business with large firms. Many businesses shy away from offering extended terms on their accounts receivable to their customers because they cannot handle the cash flow burden that comes along with the offering of extended credit terms. However, larger customers expect extended credit terms and prefer to do business with those vendors that can provide them. Through invoice or spot factoring, a business will become a more valued supplier to their existing customer base and will provide them with the potential to grow even more. The cost of factoring can even be transferred to a company’s customers and it allows the small business to grow to the extent it can with its large customers.
Repay Bank Loans
In addition to immediate cash flow needs, many small businesses also have debt hangovers from revolving credit facilities that have been termed out as a result of the COVID-19 and the change in their financial condition.
Capstone is adept at working and negotiating with banks and finance companies that are unable to extend more credit to their existing borrowers. By entering into Limited Subordination Agreements (LSA), the bank permits Capstone to purchase accounts receivable that would have otherwise been part of the bank’s collateral.
This added liquidity ensures the business owner has sufficient working capital to operate with until their credit line is paid down. In many cases, as the business grows because of the use of the LSA, the bank or finance company is paid down quicker and at less cost to the business owner. This is accomplished through increased sales and overhead being allocated over more jobs.