Working Capital Is Paramount To A Businesses Livelihood

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                               Working Capital Is Paramount To A Businesses Livelihood
                                                             By Dave Nighswander

   All of the planning in the world is an exercise in futility without the working capital to successfully
carry out the plan. If a business sells to customers on terms, then working capital availability is
dependent on cash flow timing. In most instances a business will incur a cash flow gap between the
time cash is required for inventory, payroll and operating expenses, and the time cash is received from
customers paying on terms. Let’s explore a simple example of this timing difference that makes up the
cash flow gap:

Day 1: Your business orders materials from suppliers on N/30 terms; Day 3: Your business receives
materials and begins production (which takes 5 days); Day 8: Your business ships product to
customers on N/30 terms; Day 14: Mid month Payroll is due; Day 30: Month-end Payroll and supplier
invoice are due; Day 48: Your customer remits payment to you.

In this scenario the cash gap is 34 days, which is from day 14 when payroll is due, to day 48 when
customer remits payment. The cash gap encompasses two pay periods and a payment to your
supplier, whereas the gap normally includes multiple payments to suppliers for ongoing customer
orders. If your business is mature and growing conservatively, or less than 10% per year, then you
probably have sufficient cash reserves or a bank line of credit to cover the cash gap. But, if you are a
growing business with opportunity, how do you cover the cash gap? Oftentimes a bank line of credit is
not sufficient to cover the cash gap for growing businesses because bankers look historically to your
company’s past to determine how much debt they will lend to your business in the future. Many
growing businesses have found themselves caught short on working capital as their cash flow
stretched during a period of growth.

Cash flow funding through account receivable factoring may be just the tool needed during periods of
rapid growth. Factoring is not a loan or debt, but the selling of frozen assets (invoices) at a discount to
obtain the cash in a more timely fashion (typically within 24 hours of invoicing your customer). Your
business sends invoices to your customers and a copy of the invoice to the factoring company. The
factoring company purchases the invoice from your company advancing 80% of the face amount of the
invoice. When your customers pay the invoice, the factoring company remits to you the 20% reserved,
less their fee (normally 1-5%).

In the cash gap scenario discussed above, working capital would be enhanced by providing your

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company with cash (80% of the invoice amount) on day 9! Your company would have cash flow to
make payroll on day 14, and pay suppliers and make payroll on day 30. When your customer pays on
day 48, the factoring company remits to you the 20% held less their fee.

When planning for growth in your business it is important that you assess the working capital needs
and cash flow gap in order to ensure that your plans can be met. Utilizing an accounts receivable
factoring program can assist in your successful growth. But, be sure to assess the cost of the accounts
receivable program as a percentage of sales. And, make sure that you do not have a term contract
with the factoring company so that you may exit the program whenever your business has grown to the
next plateau.

Dave Nighswander is the President and Founder of Capital Access, a business factoring company
specializing in working capital, cash flow funding, and factoring accounts receivables for businesses
across the country. For more information on Capital Access, please visit
or call (419) 732-3174.
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                              Business Finance Options For Working Capital Funding
                                                             By Steve Bush

Traditional working capital financing is currently available from a shrinking group of commercial
lenders. Small business owners should determine which commercial banks are still actually providing
this specialized commercial finance funding. As described in The Working Capital Journal, the most
active business lenders are generally not among the small number of larger banks which have
received bailout financing from the federal government.

 In most cases the active commercial lenders for this specialized form of commercial funding are
limiting working capital loans to businesses which are current in their debt payments and are showing a
net profit (based on recent financial statements). New commercial loans can often be finalized to
refinance lines of credit and term loans which have been cancelled or recalled by many lenders if these
two requirements are met. There are alternative funding possibilities such as business cash advance
programs for businesses not qualified for commercial financing using these two standards.

 Many small business owners also rely on personal lines of credit to finance some of their business
operations. There have been many reports of widespread cancellations and reductions of these
lending programs as well, especially those involving lenders which have received a multi-billion dollar
cash infusion from U.S. taxpayer money that was intended to facilitate the lending of money to
businesses and consumers.

 Personal and business lines of credit have been eliminated in many cases by lenders due to a
reduced ability to pay by borrowers and deteriorating business conditions. However, as described in
The Working Capital Journal, many borrowers had an excellent payment history for a high percentage
of recent credit line cancellations or reductions.

 In spite of the challenging lending climate, there are banks which have been very effective in making
working capital loans. The best examples are banks which have not received federal bailout
assistance. These business lenders have continued to provide working capital financing, both
refinancing lines of credit and term loans which have been recalled or cancelled by other lenders as
well as new business financing.

 Because it basically indicates that bailout funds have been given (so far) to lenders who primarily have
a history of making bad loans (virtually all lenders receiving bailout funds to date), the lending activities
described above are a serious concern to many observers. At this point, little attention has been given
to lenders with a healthy balance sheet in federal attempts to get more funds into the hands of
consumers and businesses.

 Based on recent commercial lending activity, there are several notable conclusions. (1) Businesses
need to increasingly prepare for life without relying on a traditional bank line of credit and instead
consider other viable sources of commercial financing such as business cash advances (which provide
working capital based upon future credit card processing activity). (2) The recent unwillingness by most
lenders receiving bailout funds to report in any meaningful way how and where these funds have been
used would certainly seem to be a loud and clear signal that these particular lenders are probably in
worse shape than they are reporting to anyone. (3) Commercial lenders that have a history of making
good loans rather than bad loans should be the focus of further government funding programs. (4)

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When business owners encounter difficulties obtaining commercial loans and working capital loans
from normally dependable lenders, commercial borrowers should seek out commercial finance funding
sources beyond their previous banking relationships.

Steve Bush is a working capital finance expert - commercial financing programs at AEX Small
Business Loans and Business Cash Advance Programs - The Working Capital Journal -

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