krissimmons
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Apr 10, 2007, 8:20 PM
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Better Cash Flow Management
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Okay, if you have $20,000 in receivables, no cash in your pocket and no lines of credit, what can you do? You can max out your consumer credit cards to pay your bills. You can borrow another $5000 from your mom. Or you can sell your receivables so that you get instant access to your money without having to wait on your customers to pay. Here's how this process works:
You need to call your business banker and ask if they have a program where they purchase your receivables. If they don't ask them to refer you to someone who does. If they are unable to refer you to someone, call the other banks in your area.
Ask for a meeting so that they can educate you on the program. Be sure to perform your due diligence. You don't want to be surprised by anything so ask a lot of questions.
Once you get signed up for the program, all you have to do is send the bank a copy of your invoice at the same time you send it to your client.
The bank will then deposit 90% (this is what my bank does) the same day into your checking account. The remaining 10% is held by them until the client pays the invoice. By the way, your invoices will now have the bank's PO box address instead of your address. All checks are still written to you business, just handled directly by your bank.
When the check comes in, the bank deposits the remaining 10% minus their fee into your checking account. My bank's fee ranges from 2% to 3% on every invoice.
The PRO to selling your receivables is that you get instant access to 90% of your cash. If you business is like many others, a large part of your cash flow problems occur during the period of time after you have invoiced the client and before the check comes in. This type of program will eliminate these problems. Another PRO to utilizing this type of program is that it's a great way to manage your cash flow when you don't have the credit or assets to secure a reasonable line of credit for your business. I have a $75,000 line of credit so selling my receivables isn't necessary. I simply borrow from my line until the checks come in, then I pay the line off.
The CON to selling your receivables is that the burden of collections is still on your shoulders. In other words, if your client doesn't pay, you have to find a way to get right with the bank. If you have $3000 in your reserve account (The 10% they take until the checks come in) and an invoice for $1500 is 90+ days overdue, they will simply take the $1500 out of your reserve account to cover that invoice. You won't get this money back until the client pays. If the client pays, they will deposit the $1500 minus their fee back into your account. If they never pay, you just lose the $1500 out of your reserve account. Another CON to using this service is that you usually have to sell every invoice in a given period of time. You can't decide which to sell and which not to sell. (Again, I'm speaking in terms of what my bank offers. Your bank may have different rules.) The reason for this is because they spread their risk over all your invoices, not just a few. This saves their bacon if you have a few clients that simply don't pay.
The bottom line is that if you choose to sell your receivables, you WILL lose 2% to 3% of your gross revenue. However, you do get instant access to the cash which should help you even out your cash flow on a month to month basis. As I've said before, if your lack of cash is because you don't have enough work coming in, then you have a marketing/sales problem, not a cash flow problem. If you are selling enough projects to keep you going but just can't figure out how to get by until the clients pay you, then I would STRONGLY encourage you to check out a program similar to this.
Final thoughts: If you can secure a line of credit to get you through the rough times, this is the better of the two options. If you are unable to secure a line of credit for whatever reason, then I'm convinced that selling your receivables in the next best thing.
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Kris Simmons
http://www.FEPvideo.com
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