Three case studies highlighting the power of accounts receivable factoring when used in the right situations.
Companies at their most basic level are in the business (pun intended) of investing their resources in positive ROI activities. If they can do this repeatedly and cover their working capital needs along the way, they’ll stick around. Often that requires outside financing to get over that initial bump and fill in cash flow gaps as they grow. Term loans, cash advances, and asset based lines of credit can all serve a purpose during a company’s growth. In this article, we’ll highlight a form of asset based lending called accounts receivable factoring (also known as invoice factoring) and how it can help businesses across many industries.
Many businesses grow past their customers’ payment terms. Customers tend to pay on 30 to 60 day terms and oftentimes even longer. Issues arise when the cost of delivering the product or service, business expenses, and salary need to be paid during this wait time. This is exacerbated during periods of high growth as expenses increase but so do payment terms (as you work with larger customers).
Accounts receivable factoring as a financial solution can free up to 90% of your cash stuck in AR, immediately. It’s often the best financial solution for companies that qualify – both from a price and ease of use perspective.
Unfortunately, the larger the customer, the longer the payment terms.
The following three case studies highlight the positive impact that accounts receivable factoring can have for growing businesses.
On-Demand Trucking, LLC (Transportation Carrier)
On-Demand Trucking is a startup transportation carrier that works with retailers to move goods from their distribution centers to their stores. Though sales are strong for On-Demand, and they’ve signed 4 clients in their first 8 months of business, they’ve dealt with cash flow issues. Their major retail clients pay on terms of 45 days or later (75 for the slowest payer). Though they have happy clients and are generating revenue, they have business expenses that must be paid sooner than they get paid. Without invoice factoring, On-Demand would struggle to stay in business as it does not have enough cash to pay salaries and cover fuel and maintenance costs.
Our exhibit shows that even with 3x revenue growth, On-Demand Trucking is able to generate a cash surplus of more than $186,000 using accounts receivable factoring. This can be used to lease more trucks, win additional clients, and build out the team. Accounts receivable factoring continues to help the business grow without succumbing to cash deficits.
Bdot Online Media (Web Publisher)
Bdot Online Media is an online publication with several website properties. Each website earns revenue from brands and agencies purchasing ad inventory through an exchange and also running sponsored content campaigns. Though they’re in a completely different industry, Bdot faces similar working capital issues as On-Demand, but their cash deficit is even higher. Bdot needs financing in order to pay salaries for their writers, content creators, and developers. The exhibit below highlights the company’s cash position before and after factoring.
After factoring, Bdot has similar results as On-Demand Trucking, but its cash surplus is much higher as they have a higher receivable balance (digital advertising is a notoriously slow paying industry). Instead of waiting up to 120 days with a cash deficit of $60,000, and potentially going out of business, Bdot converts these receivables into cash within 24 hours of their funding request.
Virtual Creators, Inc. (Hardware Manufacturing)
Virtual Creators is a hardware startup seeking to expand its business. The Company sells their products in bulk orders to both online and brick & mortar retailers. They manufacture overseas in Shenzhen, China and recently switched to a new, more experienced manufacturer in the region. This manufacturer doesn’t have a preexisting relationship with Virtual. As such, they do not offer trade credit and require payment as soon as the goods arrive at the U.S. port.
Virtual Creators maintains gross margins of 40% at wholesale to their retail buyers. Unfortunately, the retailers pay on net 60 day terms after receiving the product. In order to finance its supply chain, Virtual relies on accounts receivable factoring to advance cash upfront as soon as orders are received by its retail customers.
In the exhibit below, the Company avoided a cash deficit of $120,000, and paid its new manufacturing partner on time- starting the relationship on a positive note. Working with a factoring company, Virtual was able to turn a cash deficit of $120,000 into a cash surplus of $7,500. And with a 2x growth in orders, they were able to take on new orders without issue, maintaining a cash surplus throughout fulfillment.
There are better known alternatives to accounts receivable factoring on the market but their drawbacks are where factoring can truly shine. If a business is profitable, at least 2 years old, and the owners’ credit scores are high, bank loans with local or national banks become an option. However, approval can take months, and many businesses are rejected. This can grind your growth to a halt if you were planning to rely on that funding. It could even force you to delay payment to employees and vendors.
Merchant cash advances are a quicker option. However they usually require repayment within a year with daily draws from your bank account and can be horrendously expensive (APR’s exceeding 100% in some cases). If you’re a B2B or B2Gov business, accounts receivable factoring is a fast and cost-effective solution to help your business manage working capital and grow uninterrupted.
Accounts receivable factoring may be the smart alternative for financing your business. To learn more about the factoring solutions that Harper Partners provides, fill out the contact form on our Get Started page, send us a message via the chatbox below, or call us at (310) 817-0376. We look forward to learning more about your business!
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