What to Do When You Have a Cash Flow Crunch?

Put your largest asset to work for you.

That was the key takeaway of ICIC’s most recent CEO Series Webinar led by LSQ Funding.  LSQ, an accounts receivable financing provider, presented tips for how small businesses can use accounts receivable (A/R) financing as a bridge to land bank financing.  A/R financing is the sale of receivables to credit worthy customers, where receivables represent work 100% delivered or rendered.   

For many small businesses with a shortage in cash flow, leveraging A/R contracts can be a solution to access cash quickly.  Small businesses often need more working capital to scale than is available to them.  A/R financing can provide a runway for small business owners to get the working capital they need, when banks tell them “no” or “not yet.” 

That was the case with Detroit-based Micron Electrical Contracting.  Co-owners Dwayne Coleman and Les Alexander attended ICIC’s Inner City Capital Connections (ICCC) Capital Training Day, where they met executives from LSQ Funding. 

The nature of Micron’s business is very capital-intensive – they need to finance payroll for months before clients start paying, and with electricians earning a median salary of $90,000, payroll gets expensive.  Co-owner Dwayne Coleman reflected, “if you want to be a $12 million business, you need about a $2 million line of credit to get there.”  However, Micron only had a $400,000 line of credit.  The co-owners were surprised to learn at ICCC that factoring (a very similar product to A/R financing) could be a solution to their financing situation. “Thanks to factoring, we’re starting to go after other contracts,” said Coleman.

During the webinar, LSQ stressed that A/R financing should not be used as a long-term financing strategy – their average client duration is 18 months.  However, LSQ also offered reasons for why small business owners should consider A/R financing to help them get through financial growing pains.

A/R Financing Helps Small Business Owners:

• Leverage a valuable asset to lower the commitment needed from a financier.
• Control their cash flow without having to chase down invoices.
• Outsource accounts receivable management.  Many small business owners are busy wearing many hats and could do without the headache of tracking customer payments.
• Analyze customer credit.  An accounts receivable company will vet potential customers with a credit check to make sure they do not risk not getting paid.
• Qualify for supplier discounts.  More working capital means that small business owners can take advantage of early payment discounts.
• Get ‘bankable.’  Many A/R clients transition from A/R financing to traditional bank loans and build credit along the way.  Banks have different criteria for lending but a general rule of thumb is that your personal credit score needs to be 670 or above, you need to be in business for at least three years and you need to be profitable.

Learn more about A/R financing by watching the full webinar recording below.

LSQ will be one of the lenders at the Inner City Capital Connections (ICCC) Capital Training Day in Chicago on October 29^th as well as its National Matching Day in New York City on November 9^th.  The application deadline for ICCC is October 19^th.

BY Mary Duggan on October 9th, 2012

TAGS: small business | business | entrepreneur | capital | iccc | ar financing | factoring | micron | cash | financing | ask the expert | ceo series