Financing Options
INQUIRY - Financing Options
Hi Paul,
I was provided your name - We are a small SDB company doing business with several state government contracts and we are interested in finding out about alternative sources of funding such as lines of credit, etc. for cash flow - we are currently factoring but it is costly to us and I was pointed in your direction to see what alternatives there possibly are. We would love the opportunity to talk to you.
Thanks,
RESPONSE
Financing is neither my primary focus nor specific expertise. However, let me provide some direction and advice based on many years of practical experience where I had to address this issue for both my own firm and clients.
Most of my experience has been with Federal Contracts, with some State and Local Governments as well as the private sector. Typically, the rules, regulations, and options available are similar.
Other than the regular most used options, including getting (1) equity capital invested from a potential partner or stockholder or (2) obtaining a loan for working capital guaranteed by the SBA, you can try to get (3) advance payments when negotiating contracts. You can also try to improve your cash flow by requesting the option to (4) invoice more often than once a month. You can request expedited payments for invoices submitted. You can (5) offer prompt payment discounts for payment within 10 days (I use this strategically as required). But remember to not make the discount too high. Maybe between 0.25% - 1.00%. I would try 0.50% or lower first. You could ask the CO, COTR, or paying office if they have a minimum discount that they consider for expediting payment and what discount would they most likely give serious consideration.
And you should consider (6) charging interest for payments made over 30 days.
I have also successfully negotiated (7) longer payment terms for Vendor Trade Payables to allow payment when payment is received or at least 45 days. When trade vendors want to charge interest for payments over 30 days, I negotiate a reasonable interest rate, less than or equal to what I would receive from charging the customer for payments over 30 days. My goal with Vendors is to obtain longer payment terms, even if I have to pay interest to keep a Good Credit Rating. If the interest rate a vendor charges is close to what a bank would charge for a Working Capital Loan, then the financial impact is about the same.
If these do not work for you then (8) factoring may be helpful. I would use the factoring only for selected contracts required to address your short-term working capital cash flow requirements. Consider the cost of factoring and other financing requirements when determining your fee/profit objectives. This is an unspoken part of the planning thought process that successful firms use.
Finally, keep (9) a good cash flow report so you can know well in advance what your needs are and be Proactive rather than Reactive. Many accounting systems have special cash flow reports available. Use them.
Well, that's my input. Hope this helps!