Even though the economy in Alberta is doing very well, getting business financing remains a challenge. The massive boom in the oil industry has been a catalyst that has enabled entrepreneurs to start companies in many related industries such as oilfield services and transportation. However, these same businesses have often run into financial problems because of their inability to secure proper financing.
Cash flow is a problem
Most commercial sales are done on credit terms. That means that the company the receives the goods/services has between 30 and 60 days to pay their invoices. This is a common industry practice and you have to follow it if you want to work with large clients. The problem is that many companies cannot afford to wait that long to get paid. This affects small businesses the most because they seldom have cash reserves and need money to operate.
One simple way to solve this problem is to request a quick payment from your clients. There are two problems with this strategy, however. Asking your clients for a quick payment may prompt them to doubt the financial health of your business. And even if they agree to pay sooner, usually because you offered them a discount, they are always free to change their mind at any time. So while your working capital may improve, it will remain unpredictable.
A better way to solve this problem is to use business financing.
Can a line of credit help?
Obviously, a line of credit could easily solve this problem. You can use it to cover business expenses while waiting to get paid. The problem is that few small companies can actually qualify for one. Most banks in Alberta, or Canada for that matter, are conservative in nature and will only provide financing to companies that have solid collateral, an established track record of growth and solid financial statements.
Companies that are located near major banking centers, like Calgary and Edmonton, may have better chance of getting financing simple because they more access to banking institutions. However, a line of credit (or business loan) is not the only way to solve this problem. As a matter of fact, it may not even be the best solution.
Finance your invoices
A simple way to solve this problem is to finance your invoices. In Alberta, factoring has been gaining popularity as a way to finance companies in the oilfield services and transportation industries. The transaction works by partnering with a financial intermediary. They fund your invoices from credit worthy commercial clients. This fixes your cash flow problem and gives you the immediate funds you need to operate your company. You no longer need to wait up to 60 days to get money from your invoices. The transaction concludes once your end customer pays the invoice on their usual schedule as they do not need to pay sooner.
What sets receivables factoring apart from other products is that it’s easy to get. The most important requirement to qualify is to have invoices from creditworthy commercial clients. This is very important because it allows you to leverage your most important asset – your clients financial reputation. Additionally, your company needs to be well managed and be free of major problems.
Finance your growth
A receivables financing line can grow with your business, and do so quickly. Factoring companies do not have the same onerous criteria that banks do and will increase your line quickly, as long as your invoices are of high quality. This means that you can use factoring as a tool and platform to support the growth of your company.