*IF THERE IS ANY.
Principle 4 of 8 reinforces the need to be diligent during times of urgency and stress.
In the never-ending pursuit of business growth, it’s reasonable for entrepreneurs and small-business owners to feel eager and rushed to improve their cash flow.
- Payday is approaching—does the payroll account have sufficient funds?
- Bigger opportunities are landing—is there enough working capital to purchase more materials?
- Bigger accounts come with bigger challenges—are extended payment terms adding new complexity to cash flow management?
Although business growth is your goal, healthy growth requires a delicate balancing act of quick decisions surrounded by risk. When additional capital is needed, that risk includes lending contracts with hidden or ambiguous terms that could turn out to be a hindrance to growth. Don’t let the urgency of now hijack the future of your business.
Predatory lending is alive and real for small businesses looking for quick access to working capital. If not for the advocacy work of organizations like The Small Business Majority and the reporting of publications like The Business Journal, these kinds of untruthful lending practices might go unchecked. And beyond traditional banking, small businesses are on their own and easy targets for financing firms who operate outside of regulatory reach and promise quick cash for signing over future invoice payments. You may have heard it called “invoice factoring.”
“Another potential advantage of factoring over most other forms of financing is that it isn’t dependent on the SME’s credit rating. Instead, it is tied to the quality of receivables—the creditworthiness of the SME’s customers.”
Also known as accounts receivable financing or invoice financing—invoice factoring is an alternative to a conventional bank loan or line of credit (LOC). For example, if a business is experiencing growth that’s outpacing its bank LOC, it may qualify for financing from an alternative lender based in part on the value of its unpaid invoices.
But not all factoring firms are created equal, and some are created specifically to deceive. If you see fine print on your contract, read it—more than once. And before signing, get your accountant’s point of view and have an attorney weigh in on the contract’s language.
Consider all your options and be sure to have an open discussion with any lender about the details of any financial contract. Ask yourself, does the lender or financier understand my business goals? Do they support my business plan? Have they earned my trust? Do they even have fine print in their contract?
Then trust your gut.
For additional insight on how our team has rescued small-business owners from unfavorable factoring contracts, check out our case study #05.
We look forward to hearing your ideas and comments on LinkedIn.