Small Business Finance - Mistakes to Avoid When Factoring Receivables

Running out of cash to run a business is something that no business owner wants to occur. But even if you are the most careful money manager in the world an unexpected series of events can send your company spiralling and cash flowing right out the door. In those times you need solutions to help you through financial distress. One way to meet funding needs is through factoring account receivables. To make this option work for your business here are two factoring mistakes that you should avoid.
Missing the Signs of Financial Trouble
Factoring is the process of selling a customer's account to a lender in exchange for a percentage of the balance that the customer owes. Business owners typically turn to this option when customer payments are slow, sales decline, or expenses are rising faster than the growth in revenue. Before agreeing to a factoring arrangement you should prepare a cash flow projection. This will help you pinpoint cash needs, see exactly when revenues are expected to come in, and when shortfalls may occur. As you note the shortages, it is important to determine the cause of negative cash balances. Having this information in advance will help you see how your projections will change over time. When possible try to secure funding before you need it because failure to do so can put your company at an unfair borrowing advantage. Have other options available so that you have some leverage when negotiating factoring terms.
Confusing the Sources of Cash
Another word of caution involves being fully aware of where cash comes from in your business. It is easy to be deceived by the deposits that you see in your account when you do not adequately track cash sources. If your plans are to get out there in a big way you will need to manage big money. So stay informed every step of the way with financial reports. This can make the difference between needing factoring and having adequate cash reserves to take on larger projects. Refer to your company's income statement, balance sheet, and statement of cash flows for the information that you need. It is important to understand what the reports are telling you so that you are not misled by a cash balance that is derived primarily from debt.
Factoring receivables is one of the many options available to help meet the cash requirements of companies. Use this resource wisely by preparing forecasts and negotiating fair terms. Set your sights on building a company that can sustain itself. The ultimate cash flow picture is one where most of the cash comes from revenues and investments. Learn more about receivables factoring and funding a small business at http://www.tbsusa.com/



Copyright (c) 2010 Benita Tyler
TBS USA is committed to helping small business owners by providing proven financial management strategies to help them achieve their profit goals, minimize tax liabilities, and build wealth. Business advice and tax tips are available at http://www.tbsusa.com/