With the recession technically over (according to most analyst), many organizations are seeing slightly increase demand for their services. However many organizations find themselves in a peculiar situation, after streamlining their activities to survive the Great Recession, they are unable to meet increased demand from customers.
Financial institutions have tools, such as working capital programs to alleviate this situation. Cash starved, rapidly growing organizations have taken advantage of working capital programs for many years, in order to successfully balance cash-flow and business growth expenses. The following are three typical working capital programs:
Merchant Cash Advance: This device works on the simple premise of cash now for cash later. Financial institutions lend money to the business in a lump sum, based upon incoming credit card payments. A small portion of the credit card receivables is held onto as a form of collateral, and then is released as the principle is paid off.
Accounts Receivable Factoring: This form of working capital is very similar to the merchant cash advance mentioned above. However, instead of credit card payments, the financial institution uses the accounts receivable of the organization as a form of collateral. This is the main difference between the two. Usually this form of working capital is used by medium sized organizations that have larger accounts with firms that do more of their transactions on a receivable basis.
Purchase Order Financing: Primarily used by organizations that sell physical goods, this financial tool is particularly useful for large orders that strain an organization's capacity and cash-flow. Purchase order financing works in the following simplified way: 1) the financing company provides the money for the purchase order, ensuring the customer of goods gets all the goods from the manufacturing organization. 2) The goods customer then pays the financing company directly, bypassing the manufacturing organization. 3) The financing company then passes along all of the earnings, minus a financing fee, to the organization that created the goods.
While these are not the only three working capital programs used to aid growing organizations, these are three of the most commonly practiced versions. Never let another potential transaction slip through your fingers due to cash-flow or capacity restrictions!
- Brad Harmon, CLP