A Working Capital Solution for Businesses Old and New

Maintaining cash flow in order to consistently fund your business is a challenge whether you're a startup or have been in operation for decades. While it may seem a more urgent need in the early years of a business, the truth is that at any point a company might find itself in need of short-term funding. The apparel industry can be particularly vulnerable to this, as retailers have reacted to anemic sales in recent years by slowing down payments to their suppliers.

Beyond typical economic influences to a business's cash flow — macro trends like the general state of the economy or trade relations with manufacturing countries — the seasonal nature of apparel can cause ebbs in a company's cash flow that may make it difficult to cover costs without much warning. These are short-term situations in which traditional bank financing is too slow or convoluted to provide a solution. In these situations factoring, with its high flexibility and short turnaround time, is a far more workable solution.

Factoring is a financing method in which the business sells its accounts receivable at a discount to a factoring company.  This allows an immediate infusion of cash into the business, and not 30 days or more later.  The majority of the invoice value (typically 75 percent to 90 percent) is advanced within 24 hours, with the remainder (less fees) released at the time the invoice is collected.  Since the reserve amount (10-25 percent) is returned once the invoice is paid, it should not be confused with the cost or fee, which is a small percentage. 

Recently, I worked with an apparel company that regularly does business with many of the largest Canadian retailers. This firm has been in business for more than 30 years and fortunate enough throughout those decades to not have required any external financing at any point. In the earlier years of the apparel industry, retailers and suppliers both were prospering. As competition grew steadily, suppliers responded by sourcing their products overseas at a lower cost. My client at this company was able to preserve his profitability by employing this strategy until he suddenly found himself with several larger orders and insufficient internal liquidity to support them.

He knew that traditional bank-based lending was inappropriate for his purposes and turned to a different, well-known factoring company in my area. As in any industry, not every company is a fit for every business. It is always a question of your needs and the factoring partner's abilities. After spending quite some time studying the file, this particular factoring firm concluded that his business was too small for its purposes. The protracted nature of these negotiations had put this owner on edge; he'd been in contact with me for a while before his eventual rejection. I knew his situation and so when he finally gave me a mandate, I was ready to fund him in only eight days.

This kind of speed is one of factoring's great advantages, along with its flexibility. Traditional lending is increasingly restrictive, and those seeking traditional financing are turned down far more often than they are accepted. In particular, startups and companies that may be dealing with a bit of financial instability often will be unable to acquire financing through traditional lending. Factorers are not lending on the same basis. We lend based on the credit worthiness of our clients' customers, allowing us to provide short-term solutions for nearly every kind of business.

Clarence Rebeiro is president of Liquid Capital Finnovation in Kirkland, Quebec, serving Greater Montreal and surrounding regions.
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