April is Financial Literacy Month in the United States—and it provides an excellent opportunity to review and improve your business finances. First observed in April 2004, Financial Literacy Month is intended to educate people on the principles of finance and planning for a secure financial future. It’s a topic as important for businesses as it is for individuals.

Top financial challenges for businesses

Businesses face many financial challenges, from getting started and attaining profitability to navigating the financial demands of various growth phases. According to data from the US Census Bureau, there were over 32.6 million small businesses as of 2018 (the most recent data), and 99.7% of them have 500 or fewer employees. Small businesses power the United States economy, but they face particular financial challenges. Staying in business is one of the biggest: although 80% of small businesses make it through Year 1, nearly half are out of business by the end of Year Five, according to the US Chamber of Commerce. 

Why? For nearly half, it’s lack of funds—difficulty accessing the working capital needed to meet short-term liabilities and operational expenses, to keep the lights on, people on staff, and the business running. Limited or insufficient cash flow leads to many other financial problems, including missed business opportunities, too much debt, failure to raise capital, poor marketing, missed or late bill payments, and the mixing of personal and business finances. 

Businesses need access to working capital. Without it, they risk their business growth—and sometimes the business itself. But it’s not always easy to obtain working capital, especially for small, young, or rapidly growing businesses. Traditional lending like bank financing—loans and lines of credit—often have requirements that young or new businesses cannot meet. Or, their terms and repayment schedules make it difficult for small businesses to meet them and remain profitable and growing. Other options may not be better, putting small or young businesses at risk of predatory lenders or at the mercy of venture capital investors who take an equity stake in a growing business. 

Business owners can benefit from thinking outside the bank for their working capital financing during Financial Literacy Month and at any time all year. Here is what business owners should know about an often-overlooked financing option: factoring.

What is factoring?

Factoring, also known as invoice factoring, is a financing method based on the purchasing of accounts receivable. A factoring company purchases the unpaid invoices of a business for services already rendered or products already purchased. The factoring company advances funds to the business and then follows up with the customer for payment. When payment is made, the factoring company then pays the business the balance of the invoice less a fee. 

Who benefits from factoring?

Businesses of any size can benefit from factoring when they need access to cash but do not qualify for bank financing. These include situations in which a business has been turned down for bank financing. These reasons can be customer concentration, credit score concerns, insufficient assets or net worth, or being a start-up or new company without a long enough track record to satisfy the bank’s lending requirements. 

Factoring is an option when delayed invoice payment, a large order, or other unexpected circumstances constrain a business’s access to working capital—at any stage, and for businesses of any size. Established businesses may face challenges when they land new accounts and must fund the rapid growth that can come with large new orders. Factoring can also benefit businesses recovering from a financial setback, helping them regain profitability. In addition, businesses can also realize benefits from factoring by outsourcing management of accounts receivable to a professional factoring company. This can relieve pressure on staff or reduce accounting errors that may delay payment, ultimately helping a business get paid more quickly and be more efficient overall.  

When should I factor my invoices?

Put simply, factor your invoices when the gross margin on the next sale is greater than the cost of factoring, or when your business will save money with trade discounts, reduced administrative costs and collection fees that offset the cost of factoring. Another smart reason to factor is when landing new business—and funding it—through factoring will increase your bottom line. 

How much does factoring cost? 

The fee varies by the amount of time it takes to collect the receivables. Typically, the fee ranges from 2-5% of the invoice’s face value. Some factoring companies (like Prairie Business Credit) will only collect the fee when you receive your payment. 

Does factoring affect my credit rating?

Factoring invoices gives businesses access to cash to pay bills, pay down debts, meet operational expenditures, and make investments in growth. This can help businesses improve their credit ratings and take advantage of discounts and better terms from suppliers. Ultimately, these actions can help to accelerate a business’s ability to obtain bank financing in the future.  
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Looking to protect and grow your business with access to working capital? We can help. Prairie Business Credit is a national working capital provider to young, growing, or recovering businesses. We offer accounts receivable financing, purchase order financing, and equipment financing. Our company serves both as a trusted financial resource and consultant to entrepreneurs dedicated to building their businesses and ensuring their success.  










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Everyone has heard the saying, “It takes money to make money.” Business owners know this is true. It takes physical resources like space, materials, and components to produce your products, not to mention the costs of skilled labor, expertise, and administrative support. Moreover, growing a business can require additional working capital, but a young business does not always have easy access to the funds it needs.

What is working capital?

Working capital is the money available to meet your business’s immediate and short-term operational expenses—things like payroll, supplier payments, administrative expenses, rent, utilities, and more. It’s calculated by taking current assets and subtracting current liabilities. 
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A shortage in working capital can be a real problem for a business, preventing it from meeting urgent short-term operational expenses. Young, growing businesses face specific working capital shortages—often, they have not been able to secure enough working capital to support the business during its early stages, or during stages of rapid growth. Without enough working capital, a business may miss out on key opportunities. Perhaps there are insufficient funds to invest in new product for a large order, restock inventory, or take advantage of discounted payment terms from suppliers. A working capital shortage can also have worse consequences, like late payments to suppliers or creditors, which can damage credit ratings or even a business’s reputation. It is why business owners are often under pressure to ensure access to working capital.

How much working capital does your business need? 

The answer to this will vary depending on your business, what you sell, and your growth phase. Typically, startup and young businesses should ideally have six to twelve months of operating expenses on hand to meet the short-term needs of this cash-hungry stage. This is because growing businesses face significant investment in staff, certifications or filings, inventory, and other related costs simply to get up and running. More established businesses may find that three to six months’ worth of expenses is enough to handle seasonal fluctuations or slower periods in business. 

The problem is that the repayment or financing terms of certain working capital options may put a strain on young businesses during this period of rapid growth. If repayment is due before your business is able to generate increased cash, you will remain in a working capital pinch. 

Many business owners turn to lending options to raise working capital or address a working capital crunch. Here are a few of the most common sources for working capital for young businesses. 

Working capital options for businesses

• Bank loans. Business owners commonly turn to bank financing as a means of raising working capital. Traditional and new-business loans, though, often require a high credit rating for both the company and the individual named on the loan. Young businesses without sufficient sales or that raise creditworthiness concerns may fail to qualify for bank financing. In addition, high interest rates and strict repayment schedules can make bank loans a challenge for newer businesses. 
• Business line of credit. A business line of credit is a type of revolving loan that provides access to a set amount of working capital for your business. It can help businesses navigate fluctuations in revenue and expenses. Like bank loans, though, business lines of credit can be difficult for young or new businesses to obtain because of the requirements of credit ratings, collateral, and other terms. 
• Credit cards. A business credit card can help to provide some access to working capital while also building a credit history for your business. Often, though, business owners encounter credit limits or tap into personal credit cards, which can introduce new financial risks and problems into the equation. 
• Investors. Young businesses may turn to investors or seed funding to provide access to working capital for the business. The downside is that this can mean giving up equity—and sometimes control—to others who now have a permanent stake in the business. 
• Personal loans. Some business owners turn to family or friends for loans, but failure to repay the loan at agreed-upon terms can damage even the closest relationships. ​​

The best working capital option for young businesses

There is another option that can provide working capital for young businesses: factoring. Also known as invoice factoring, it is a financing method that can provide fast access to working capital. Businesses sell their unpaid accounts receivable to a factoring company. The factoring company pays an advance and then collects payment on the invoice, paying your business the balance minus a fee. Factoring can solve short-term cash flow crunches, even for start-up or young businesses, or those that face long odds with bank financing because of credit ratings or credit risks. 

Looking for the best working capital options for young businesses? We can help. Prairie Business Credit is a national working capital provider to young, growing, or recovering businesses. We offer accounts receivable financing, purchase order financing, and equipment financing. Our company serves both as a trusted financial resource and consultant to entrepreneurs dedicated to building their businesses and ensuring their success.  

August 2020, Newsletter

When you are looking for a partner to help your customer or prospect get the financing they need, what are you looking for in that partner? If the company is not "bankable," often, that company's trusted advisors help look for a "bridge" lender. Before making that referral, make sure you know where that bridge leads.
 For the past 26 years, Prairie has been in the business of graduating or providing a bridge to bank financing or self funding. We provide factoring and purchase order financing to growing and recovering businesses.

By providing working capital facilities from $20K to $2MM, lending decisions often on the same day an application is received, contracts with no minimum fee requirements or termination penalties, Prairie can get your prospects on a bridge back to you.

July 2020, Newsletter

In order to survive as an entrepreneur, optimism is necessary. As we see in the article below, this optimism is still strong in our entrepreneurs, despite the COVID-19 pandemic. However, blind optimism without the proper preparation is more akin to gambling than running a business. So, what happens to a business's cash after a period of lower revenue, and sales start surging? If a company sells to customers and offers terms, as revenues surge, a business could face a severe cash shortfall.

In times with steady revenue, a business should expect to collect a consistent amount of cash each week that would equate to the amount of sales they had 6 weeks ago, assuming their customers pay at 6 weeks on average. When a company goes through a sales downturn, it stands to reason that 6 weeks after that, the cash intake will be equivalent to the lower level of sales. As we see in the Manufacturing Cash Gap and Service Business Cash Gap graphics below, the higher inventory and payroll cash needs come much sooner than the increased accounts receivable collections. So as sales grow, cash needs increase and the company is left with less cash coming in the door. This can be a recipe for disaster. A company with well-structured debt should have a line of credit in place for times like these, but what about the companies that don’t or for the company that used that line of credit to get through the shutdown? Factoring could be a great tool for helping them take advantage of surging sales, because factoring allows a company to receive cash when their product or service is delivered instead of waiting that critical 6 weeks.

“After the downturn, our bank relationship changed. We were getting back on our feet and making payments but we needed cash to meet our customers’ needs. We looked at a lot of lenders.  Prairie Business Credit understood manufacturing and they understood our needs. They came up with flexible solutions that helped us with cash flow so we could take orders, even months out. We didn’t lose orders and they helped us manage receivables so we stayed on top of past due accounts.  Prairie Business Credit supported us until we could get an SBA loan with a bank."

- Former Client

February 2020, Newsletter

13 Week Cash Flow Forecast

“Small businesses can stop guessing and get a real handle on their cash position in the near future with this great tool. Many entrepreneurs initially think their cash flow position is very different before they use this method. Knowing how much cash you will have on hand can make the difference between thriving and dying.”

- Dylan Morgan, Prairie Business Credit, Executive Vice President

What Others Are Saying About Us

"We manufacture and resell digital security equipment and software. Venture capitalists offered to fund us, but we wanted to maintain control. Banks wanted a longer track record. When a major retailer selected us for a nationwide rollout, our sales grew from $100,000/month to $1.3 million/month. That's when we called Prairie Business Credit to craft a deal to fund our growth. Now we're securing a commercial bank line for ongoing capital needs. Prairie Business Credit provided the bridge we needed to take our business to the next level."

- Former Client

When lack of cash keeps you from making the next sale, factoring may be a solution. When the benefits of factoring (including immediate access to cash, and the ability to continue production, make payroll, pay taxes, and/or take advantage of vendor discounts) outweigh the costs of factoring, then factoring should be considered.

How to tell:

• Is the gross margin on that next sale greater than the cost of factoring?
• Can the savings gained through trade discounts, competitive credit terms, and reduced administrative and collection costs offset the cost of factoring?
• Will accepting new business and keeping it by factoring increase the bottom line?

If the answer is yes to any of these, then factoring works.

July's Feature

"If you sell your business, you are no longer in control, regardless of what the buyer promises or implies. So the question you must answer is what is it you really want from your business. Do you want the activity, the accomplishments on your own terms, the pride of ownership because of the good reputation that your customers and vendors associate with you, or do you just want the money to do something else other than be involved in the business you built. It really is a binary choice. It's a simple but hard truth: if you sell, it's not yours anymore."

- Trevor Morgan, Founder & CEO, Prairie Business Credit

"Leading with the straight forward truth is the best. If you can’t find the money without that, maybe you just aren’t ready. Great ideas always find the money to make it work."

- Dylan Morgan, Executive Vice President, Prairie Business Credit
 

If you are a small business banker tasked with bringing in new business, find a factor to partner with. Customer loyalty in any business is built by satisfying prospects’ strongest needs when they need it most, and an independent factor can help fill that temporary need until the prospect is bankable.

Nearly every young business is starved for cash, and most are unlikely to qualify for bank financing. Factoring is the purchase of the client’s accounts receivable at a discount; factors are the companies that complete factoring transactions.

Factoring gets cash into the budding entrepreneur’s hands immediately upon sale, which can mean everything to the success of the business. It’s one of the oldest known forms of money lending, with records dating back 3,700 years.

When I was prospecting for small commercial customers as a bank trainee in 1974, I learned an invaluable lesson about what can be gained by timely satisfaction of a prospect’s borrowing needs. I learned the lesson when calling on Frank, the friendly founder and owner of a small screw machine shop.

I managed to get the appointment only because Frank was heading his golf club’s membership committee, and young commercial bankers were prime targets. On that day, though, neither of us was buying from the other. I had to politely decline joining the golf club – though I did join three years later – because that type of bank perk wasn’t offered to newbies like me.

Frank wasn’t buying from me, either. Instead he told me the story of how my bank’s best local competitor had walked into his office 20 years earlier – the day Frank opened his doors – and put together a loan package that Frank desperately needed to seize a profitable sale. Because of that, he said there was absolutely nothing my bank could offer that would get him to move, no matter how our services stacked up, or whether I joined the golf club.

Frank’s experience encapsulated a universal truth about creating a competitive advantage by satisfying a critical need at the right moment. Find the referred prospects with critical cash needs and a way to satisfy them, and they’ll stay at the referring bank forever.

Factors have no magic credit knowledge that enables them to make loans a bank cannot. They simply are able to lend to difficult credits by verifying every invoice they advance on and by taking absolute dominion of collections.
Factoring is more expensive than bank loans, because a factor’s operating expenses are exponentially higher, due to attention paid to the client’s administrative detail. That intense monitoring also imposes good credit, billing and collection habits on the borrower. So when the performance and balance sheets of a factor’s clients pass muster with the bank’s credit standards, the bank can be reasonably certain that the prospect’s administration and reporting abilities are in good order.

Most factoring operations are not bank-affiliated, so they do not compete with the bank for services. Some factors specialize in industries such as trucking, where the customer will remain a borrower of the factor. Others act as bridge lenders, which pertain to the banking community, because they fill a need for sizable working capital when the borrower’s balance sheet won’t satisfy a bank’s credit requirements.

When a factor concentrates on companies with strong gross margins and large immediate growth opportunities, its clients generally level off in their growth, collect their profits, and build their balance sheets well enough to satisfy a bank lender in 12 to 18 months. Graduation rates of factoring clients vary radically, depending on the factor’s approach, so their graduation rate can be a good indicator of your chances of getting your referral back.

If you are a business banker with a need to get a competitive leg up and establish lifelong customers, consider partnering with a factor. Factoring is an effective tool to lend to nearly unbankable companies, and it can increase your chances of banking your “Forever Frank” customers.

- Trevor Morgan, Founder & CEO, Prairie Business Credit
This article was featured in the Hoosier Banker Magazine May/June 2019 issue.

May's Feature

What Others Are Saying About Us

"We were helping to finance an acquisition for my customer. My customer needed a quick turnaround, so our bank called Prairie Business Credit to provide the working capital. This was critical to the acquisition so the customer could hit the ground running, keeping suppliers paid and raw materials readily available.  
 
If we didn't have Prairie Business Credit, my customer would have needed to raise a lot more capital.  Prairie Business Credit was very responsive and moved quickly to get the deal done.

Our bank has had a long- term relationship with Prairie Business Credit for over 20 years. They are a trusted and known resource to our bank because they are very bright, responsive and they have the ability to move quickly to fund a deal."

- Vice President Business Banking