Working capital: what to do when the bank.

• Author: Naor, Rick
• Position: FINANCE

Even in a good economy, almost every business is confronted with cash flow problems at one point or another. For instance, sudden growth periods, capacity expansion, new marketing campaigns, funding a major sale, or hiring new staff can create an immediate need for funding. Current research shows that a good proportion of small and medium-sized businesses falter not because their underlying business model is broken, but because of difficulties in meeting short term financial obligations. The last thing you would expect of a growing and profitable business is to get into serious financial trouble, but on closer examination, in fact, it's not surprising.

Even for established businesses, collecting on accounts receivable can be challenging. If just one or two larger customers pay two to four weeks late, it could be enough to trigger major cash flow issues. Production problems or import delays are other common strains on a company's cash flow, potentially resulting in the inability to meet payroll, pay important suppliers, or make statueCory government payments such as HST or source deductions.

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Traditionally, businesses have relied on corporate lines of credit from banks to bolster their capital. Business owners also tap into their personal credit cards for short-term bridge financing. But what happens when these traditional means of funding are not available or sufficient? There are other options, for surviving those cash-strapped cycles, especially during periods of business growth. Two lesser-known alternative forms of financing are Factoring (or Accounts Receivable Financing), and Purchase Order Financing (also known as Trade Finance).

Factoring allows businesses to be paid immediately upon shipping its goods or providing its ser vices, rather than wait until the due date stipulated by the invoice terms (e.g. net 30 days). The factoring company purchases its client's quality accounts receivables, pays for them upfront, and then collects upon the invoice due dates from their client's customers. Typically, the factoring company will provide their clients between 75 and 85 per cent of the face value of the invoices right away, with the remainder being forwarded once their customer's invoice is paid in full. If, for ex ample, a company invoiced their customer $20,000, the factoring company would pay the company upfront in the range of $15,000-$17,000 as soon as the goods were received by its customer.

Factoring fees are...