The life blood of any business is cash flow

The life blood of any business is cash flow. Cash flow is the net amount of cash moving into and out of a business. Positive cash flow indicates that a company's liquid assets are increasing. Negative cash flow indicates that a company's liquid assets are decreasing. Net cash flow is distinguished from net income which the revenues recognized in a period, less the expenses recognized in the same period. Cash flow consist of two components:

1. Timing - when you will get the cash

2. Volume - the amount of cash you will get

Timing – Factoring obviously can have a big impact on the timing of cash flow. If everyone paid COD (Cash on Delivery), factoring would not exist, as no one would ever have a receivable. However, as we all know, customers seldom pay COD, therefore most companies have stranded cash setting in their receivables. If a company has not accumulated enough cash to pay its bills before it is paid, companies must obtain a loan, or factor their invoice. When companies do not qualify for a traditional bank loan, factoring is an option.

Volume – Factoring does not by itself increase the volume of cash flow. In fact, the expense of factoring actually decreases cash flow because of the associated fee. However, factoring can help increase the volume of cash flow if used correctly. What does this mean? If a business uses the factoring proceeds to pay for already incurred expenses, then it will not help increase volume. Using factoring to pay for a down payment on a new tractor, volume will go up with the added equipment.

NOTE – Increasing the advance rate does not increase a client’s volume of cash flow, only the timing. Once a client has a 100% advance, they no longer have any place to go in the event of a future problem, that is the main reason 100% advance are actually bad for clients. Having an advance rate less than 100% is like having an emergency credit card, you can use it as a last resort. Plus, you will save money on the lower advance rate.