Cash Is King. Is Factoring Your Best Option To See More Of It?

Businesses need cash, especially small businesses. So if no one's lending, and the customers aren't paying on time, where does the cash come from?

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What’s A Business To Do When Times Are Bad? Raise Prices, Of Course

If you’re feeling the heat of the current economic malaise, revenue is down, profits are down, and you’re down. But I’ll bet you have a plan. You’ll work harder. Incentivize your employees. Sell more. Everything will be fine. 

So you’ll implement your plan. And then, months later, you’ll reassess. Measure. And bingo, everything will be fine. Right?

Right. Unless of course, it isn’t. What if you’ve tried “everything” and business is still headed south? Profits are still down? And now, employees are irritable and wondering about the future? What went wrong? 

Well, it’s possible that you weren’t thinking outside the ‘ol box. Hard work is not always the cure for what ails a business. Sometimes adjusting prices—upward—may be the best course to correct a ship’s bottom line. Especially if, unbeknownst to you, your business model is lacking. If you’re implementing the old ‘work harder, cut costs’ model, you may be helping... but not nearly enough. And you may be simply prolonging the inevitable slide that takes over 70% of small businesses past the point of no return, on the way toward bankruptcy. 

Pretend for a moment that you’re a cabinetmaker and it costs you $400 to create a cabinet that you sell for $800. Sell 5 cabinets and your gross profit is $2,000 (5 cabinets x $400 margin). Now, if business is suffering and you’re not selling as many units as before, you decide to raise your price per unit to $900. This may scare some customers away, say 1 out of 5. So, while your sales would drop to $3,200, your production costs also drops to $1,600 as you also save on variable costs like credit-card fees and freight, and delivery.

But who’s to say that a minor price increase is going to scare off customers? Especially if your business enjoys a loyal customer base? They know you and trust your work, and they often refer business to you. They, or the people they refer to you, could very easily shrug off the minor increase and you could be selling 5 or more cabinets, making you profitable.

Now, there is no guarantee that raising prices will save an ailing business, but if a struggling business keeps doing things the way its always done them, they’re likely to fail anyway. At least the price adjustment gives them a shot.

Unsure What To Do Next? Just Ask Your Customers

Happy days are here again. Well, I wouldn't exactly get giddy over a jobless recovery at a rate of about 2%, but nonetheless, we are supposedly heading upward. If that's true it likely means the competition is going to get tougher. So now is when you need to start thinking about how you can elevate your business above the competition.

But remember this: times, and ideals, have shifted. Tectonically in some cases. Consumers are unlikely to easily slip back into their free-spending ways. Coming up with your competitive advantage is tough.

One of the best ways is to ask yourself, "Why are customers buying from me now?" I'm sure you know some of the reasons already. But for the best answers, go directly to the source... ask your customers why they keep coming back (with a Web site survey, email newsletter, a friendly one-to-one question, or some other way... get creative). Their answers might surprise you--or at least give you some ideas on how to maintain their loyalty and attract new customers.

But the point here reflects one of the core tenets of successful business: give the customer what they want. Are there certain products or services you don't offer that you should? Is there another pricing structure that might work better for a client? Are you charging for shipping while most of your customers want it for free? All of these, along with countless other issues, are important to know, and can drastically affect your revenue.

And while you're waiting for the responses--or if you don't feel it's a question your customers will answer--try viewing your business from your customer's vantage point. Would you be comfortable enough with the overall customer experience to come back to your own Web site, store or business? Would you be a loyal customer of your business? Be objective... and in doing so, you're likely to learn a few things that will go a long way in strengthening your business.

FICO Score - What is Considered a Good FICO Score?

What does your FICO score mean? FICO stands for Fair Isaac Corporation and is an evaluation of the risk that you will go late on a credit obligation. The scoring system is based on extensive research of payment habits and patterns. As with any system that evaluates potential risk, it is not 100 percent accurate nor is it 100 percent fair. However it is correct more often than not.

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Factoring Receivables- The Real Cost

In January 2008 Inc. Magazine, "Short on Cash?" in the Finance: Cash Flow column, the point was made that a factoring discount was an equivalent annual interest rate of 12 times the factoring discount rate. This hypothetical 12 times interest rate is then compared to a bank loan at a competitive annual rate. For the article this meant that a monthly factoring discount of 2% is equivalent to a 24% annual interest rate. This is really a misleading comparison of apples and oranges. In reality a 2% factoring discount rate is equivalent to a 2% annual interest rate, but to understand it we need to go into some detail.

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The World Bank Study on Factoring

Around the world, factoring is a growing source of external financing for corporations and small and medium-size enterprises (SMEs). What is unique about factoring is that the credit provided by a lender is explicitly linked to the value of a supplier’s accounts receivable and not the supplier’s overall creditworthiness. Therefore, factoring allows high-risk suppliers to transfer their credit risk to their high-quality buyers. Factoring may be particularly useful in countries with weak judicial enforcement and imperfect records of upholding seniority claims, because receivables are sold, rather than collateralized, and factored receivables are not part of the estate of a bankrupt SME. Empirical tests find that factoring is larger in countries with greater economic development and growth and developed credit information bureaus. In addition, we find that creditor rights are not related to factoring. This paper also discusses “reverse factoring”, which is a technology that can mitigate the problem of borrowers’ informational opacity in business environments with weak information infrastructures if only receivables from highquality buyers are factored. We illustrate the case of the Nafin reverse factoring program in Mexico and highlight how the use of electronic channels and a supportive legal and regulatory environment can cut costs and provide greater SME services in emerging markets.

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The History Of Factoring

Factoring's origins lie in the financing of trade, particularly international trade. Factoring as a fact of business life was underway in England prior to 1400. It appears to be closely related to early merchant banking activities. The latter however evolved by extension to non-trade related financing such as sovereign debt. Like all financial instruments, factoring evolved over centuries. This was driven by changes in the organization of companies; technology, particularly air travel and non-face to face communications technologies starting with the telegraph, followed by the telephone and then computers. These also drove and were driven by modifications of the common law framework in England and the United States.

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Customers "Banking" on Your Working Capital

Customers "Banking" on Your Working Capital Nearly all business-to-business suppliers are feeling their working capital squeezed by customers delaying payments, according to the Credit Research Foundation. Sarah Johnson - CFO.com | US March 4, 2009 Nonfinancial companies are unwittingly acting as banks these days, as customers slow down their payments in an attempt to give their own working capital flexibility. In a recent survey of corporate credit-department managers, 94 percent said they suspect that their customers are leaning on them for their working-capital needs more than they were during the past few years. And it's no wonder creditors have that concern: 79 percent of 1,085 companies surveyed last month said that they have seen a general slowdown in their customers' payments. And just over two-thirds said their customers' banks have tightened their lending practices.

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What Gives? A Study of Firms' Reactions to Cash Shortfalls.

This paper examines whether firms react to cash shortfalls by cutting investment. We use a regression discontinuity design in which the discontinuity is the point of violation of underfunding of corporate defined benefit pension plans. We reexamine the puzzling evidence in Rauh (2006) that mandatory pension contributions cause sharp investment declines, finding that these results are likely due to the endogeneity that this study is trying to avoid. We also compare firm-year observations in which the firm’s pension assets are just barely less than its pension liabilities to observations in which assets are just greater than liabilities. In this quasi-experimental setting, we find little evidence that firms cut back on investment. Instead, they mostly use a variety of financial tools, such as receivables factoring and payout cuts, to fund their pension liabilities.

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