What can you do when your business’s pace of growth requires more capital than you can get with your existing line of credit or your available collateral for asset-based lending?
“Extreme growth businesses are very difficult to finance conventionally,” says Kevin Ehinger, VP of Market Operations at global working capital exchange C2FO and a former banker. “If you’re growing really rapidly, banks are usually not comfortable with that.”
Conventional working capital sources, such as revolving lines of credit, are inefficient for “extreme growth” companies, Ehinger continues. “You have to think about timing. When you’re producing a product to sell before you are paid for the last one you sold, you need [alternative] financing solutions.”
Methods such as factoring, supply chain financing and receivables acceleration such as C2FO, can help you access the working capital necessary for rapid growth. Here are some short-term financing options to investigate.
When you factor, you sell all or part of your invoices to a third-party factoring company, which then collects the receivables from your customers. There are two kinds of factoring: non-recourse (or full sale) and recourse.
In non-recourse factoring, you receive the full value of your invoice minus the fees and interest charged by the factor. In recourse factoring, the factor pays you part of the invoice upfront, but you don’t get the balance of the invoice (minus fees and interest) until it is collected from your customer. If they can’t collect, you won’t get the balance and will still owe the factor fees.
Interest rates for factoring can be prohibitively high; it is possible to get lower interest rates with recourse factoring, but you also risk not getting paid for the full amount of your invoice. In addition, you have no control over interest rates, which are based on your debtor’s creditworthiness and not your own.
Factoring also requires underwriting and may require a minimum amount of receivables to be funded to receive a better APR.
Supply chain financing
In this type of short-term financing, your customer leverages a third-party financial institution to accelerate payment to its suppliers. The interest rate is based on your customer’s creditworthiness, rather than yours, which usually means lower rates than a small or midsized business could get on its own.
On the downside, your customer may only offer supply chain financing (SCF) to its largest, most valuable suppliers due to the paperwork and process involved. A small or midsized business may not meet those criteria, therefore limiting your ability to get access to this option.
Supply chain financing can also mean getting too little—or too much—capital. You can only borrow as much your outstanding invoices with the customer offering SCF. At the other extreme, a customer may require you to finance all your invoices with their company, even if you don’t need that much money.
Collaborative Cash Flow Optimization (C2FO) gives you access to a working capital marketplace that benefits both buyers and suppliers. As a supplier, you select the invoices you want to accelerate, set the interest rate or discount you’re willing to accept, and then receive early payment directly from your own customers.
Many invoice financing options have steep advance rates, which means you may get as little as 75% of the value of a receivable, Ehinger says. However, by accelerating your receivables through the C2FO marketplace, you get the value of your entire invoice minus a small discount that is often less than your cost of borrowing. You set your own rates, retain ownership of your invoices, and can have access to as much or as little working capital as you need.
“There’s a lot of value in the predictability C2FO creates,” says Ehinger. Fast-growing suppliers to big customers don’t have to worry about receiving payment—but they don’t always know when they’ll be paid. “[C2FO] not only benefits them financially but also makes their business more forecastable,” Ehinger explains.
Best of Both Worlds
Combining short-term financing with existing asset-based loans or lines of credit can give you the flexibility you need to manage day-to-day operations of a rapidly growing business. Use long-term solutions for long-term needs such as purchasing a building or manufacturing equipment and short-term solutions for immediate needs such as buying inventory or ramping up for your busy season.
It pays to know your options
Working capital is crucial for any business. Rapidly growing businesses benefit by having access to more than one source of working capital to fill increased orders and pay growing staff. In the 2016 Working Capital Outlook Survey conducted by C2FO, more than 60% of the small and midsized businesses surveyed were concerned about how to finance long-term growth. Additionally, 76% of these SMEs rely on cash flow from operations for growth. Understanding your options for working capital helps you take control of your cash flow and manage even rapid growth.