Have you ever had an opportunity to close on a piece of business, but you couldn't move forward simply because you lacked the financing to make it happen? Have you ever had to turn away an opportunity because you lacked the cash to purchase the materials needed to complete the order? Maybe you've never actually faced such a situation, but it's more than likely that your cash flow problems have inhibited your growth aspirations.
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It's more than likely that your cash position has limited your opportunities. As such, it's fair to say that any company having issues with cash flow makes a conscious decision to only pursue the type of business they can afford to finance. It's one of the more serious issues associated with having an uneven cash position, and it's also one of the biggest reasons companies scale back their plans for growth. However, you don't have to let your cash flow issues hold you back from increasing your company's market share. A solution includes using an invoice based financing option called receivables factoring. It's a solution that can help you increase market share and improve your customer retention.
Growing Market Share & Customer Retention
In an economy such as this one, a company that defends its market share is one that grows its market share. That's not meant to confuse. Instead, it's meant to explain that in declining markets, defending market share and growing market share are the same thing. Why? Simply put, the business your company defends today will increase once the economy rebounds. It certainly makes sense. Keeping more of your customers when the economy is in a slowdown means your company will have more business when the economy rebounds.
Ultimately, this aforementioned scenario points to the importance of improving your company's customer retention. In essence, retaining more customers means your company is effectively protecting its share of the market. Therefore, you must focus on increasing customer retention now so that your company is better positioned later. However, how can you do that when your company lacks the cash flow to properly finance its inventory? How do you keep your customers when you lack the capital to purchase the raw materials needed to make finished goods? Finally, how do you defend market share and keep customers when your company is overwhelmed by a lack of credit? Simply put, you don't. In the end, you can't defend market share and keep your customers if you don't have the capital to finance your business. So how can receivables factoring help your company increase its market share and improve your customer relationships?
The Solution Provided by Receivables Factoring
Receivables factoring is an invoice-based financing solution. There are several such solutions and they are all predicated on using a company's assets in order to establish a business line of credit. For instance, some companies use their real-estate as collateral. Others focus on using their inventory counts of finished goods in order to secure credit. In this case, the inventory must be underwritten in order to define a workable credit limit. Yet, other companies use purchase order financing, which is a solution that allows companies to use current customer purchase orders and contracts in order to secure capital. However, most companies don't own their building outright. Instead, they opt to lease their warehouse and office space. In addition, inventory financing is difficult for companies that don't have high inventory turnover rates. If your company takes too long to sell product, you could see your financing increase with this option. That leaves both receivables factoring and purchase order financing.
Financing Receivables is a process where your company sells your receivables to a financing company. The sale means the financing company owns the right to collect on your receivable. In exchange for that right the financing company advances your company a percentage of the receivable. In most instances it's 90 percent of the receivable's value. Once your customer pays their invoice, the financing company credits your account the 10 percent difference, and charges both an administration fee and an effective rate.
With purchase order financing, your company is able to use the value of current customer orders and contracts as collateral. In this case, you provide that purchase order to the financing company as proof of the business you've secured. The financing company advances your company capital the same way they would with receivables factoring. Finally, once you invoice your customer, the financing company takes over the responsibility of collecting on the receivable. They then credit your account the difference between the original advance and the final payment. With receivables factoring, you use your receivable once it's generated. With purchase order financing, you use your purchase order as collateral the moment you secure an order. So how do both of these options help your company defend its market position, increase its share of the market and retain more of its clients?
Financing and Your Business's Opportunities
First, both purchase order financing and receivables factoring provide you with two alternative credit sources. Second, these credit sources improve your cash flow and reduce your costs of financing your operations. Third, both of these options allow you to pursue business with any customer. No longer do you have to concern yourself with cash flow. No longer do you have to worry about whether you have the funds to purchase raw materials and finished goods. No longer do you have to question whether you have enough credit to support your aspirations of growth. Instead of turning business away, you can aggressively pursue all business, regardless of its size.
These alternative financing options also lower your company's costs of capital. In fact, they can give your enterprise the upper hand when going up against competitive bids. How is this possible? In order to answer this question, think about what a positive cash position means for your company. Think about how you can use that cash to lower your costs of financing your business and your inventory. A strong cash position means you can negotiate favorable credit and payment terms with vendors, creditors and partners. A good place to start is to get your vendors to give you net-10 day terms with a 2 percent discount on invoices. Another approach would include securing a price discount from vendors for prepaying your orders. Finally, you can lower your freight on shipments by prepaying freight companies. In each of these aforementioned examples, your company is able to lower its cost of goods sold (COGS). Lowering your cost of goods sold allows you to be more competitive on bids.
Don't put your company's growth plans on hold. Don't forego the opportunity to close on business simply because you think the financing needed to make it work is out of your reach. Finally, don't lose customers because you have a poor cash position. If your company has a solid product, and a large client list, then use both to your advantage. Make that all-important sale and use receivables factoring and purchase order financing to increase your market share and keep more of your customers.
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