How does Trade Cycle Financing help Cash Flow?

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by Brian Dineen

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01.12.2021

One of the most important aspects of financial management for any business is cash flow. Proper cash flow management insures that your business remains healthy and profitable. Cash flow mismanagement can spell doom, even if overall revenue is robust.

There are three alternative financing vehicles that can help any business effectively manage their cash flow. The first is Factoring. Unlike most finance programs, factoring does not involve borrowing money. You are selling an asset for cash. In this case receivables. The factoring company purchases your invoices as they are created, paying you up to 90% of the invoice amount immediately. The remaining balance is held until the factoring company gets paid by your customer, at which point they pay you the remaining balance after fees are deducted. This program is the most widely used amongst the three. Its purpose is to accelerate the speed that you collect money, allowing you to acquire cash more quickly to meet frequent obligations (payroll, payables, supplies, etc.).

Next, we have Purchase Order financing. Usually most effective for distribution companies that buy a finished product and then ship it to customers for a marked-up price. Rather than paying for the product, billing the customer with terms, and then waiting for payment, the P.O. finance company pays your supplier directly. You then repay the finance company once you’ve collected from your customer. This eliminates the cash flow deficit that can occur when payment for goods happens more quickly than collection from the sale of those goods.

Finally, Accounts Payable financing is a program that preserves your cash until your reserve adequately covers bills without the threat of drying up; you direct the finance company to pay certain bills and then determine when you want to pay them back (30-60-90). Not only does this preserve cash for ongoing operation, but it allows you to take advantage of early pay discounts – saving money on your purchases.

If you would like to learn more about any of these programs please contact us.

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About the Author

Brian Dineen

Brian Dineen is the owner of Trinity Capital Partners. Mr. Dineen has experience in all facets of the commercial lending industry. His expertise includes credit evaluation, underwriting, collateral valuation, lease structuring, loan packaging, and loan/lease closing.

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