How to Fix your Biggest Cash Flow Problem

The most common cash flow problem that companies have occurs because clients pay their invoices in net 30 (or net 60) day terms rather than paying immediately. Some companies have reserves that can be used to cover business expenses while waiting to get paid. However, most small and medium sized businesses don't have adequate reserves and cope with this problem by juggling vendor payments.

Juggling and delaying vendor payments works to an extent. But if your business is growing, you will soon find that juggling payments alone won't do the trick. Eventually you will run into serious cash flow problems that could affect your company's ability to operate. And if the problem grows, you may be at risk of missing your most important payment: payroll.

The simple solution to the problem is to use business financing to cover any cash flow shortages until clients pay. Getting business funding in the current environment is complicated since institutions are only providing business loans to solid companies. To qualify for a business loan, most companies must have impeccable financing statements, experienced management and collateral that can be pledged as security for the loan. Few small or medium sized companies can meet these characteristics.

There is one alternative way to solve this problem - you can get a quicker invoice payment using a tool called invoice financing. With invoice financing, your client does not pay sooner. Rather, a financial intermediary provides an advance against your invoices. This gives you the liquidity you need to operate your company, without having to worry about when your clients will pay. You then settle the transaction with the financing company once your client pays the invoice in full.

Invoice financing is easy to obtain and available to most small and midsized companies. Since the finance company is funding your invoices, it's important that you work with clients who have good commercial credit. The fact that financing is tied to your invoices also makes it very flexible as it will grow with your sales.

Invoice financing won't benefit everyone though - the product is best used by companies whose biggest problem is that they can't afford to wait 30/60 days to get paid by clients.