If you own a small business or are planning to start one, you may find yourself jumping through some hoops to build your client base. Competition is tough and businesses have to find ways to differentiate and create opportunity.

One way that smaller B2B businesses try to compete is by offering great credit terms to their customers. Since many large corporations negotiate and push their credit terms to net-60, 90, and beyond, small businesses have to accept the terms in order to maintain large accounts and clients.

But for a small business to wait more than 90 days for payment causes cash flow problems. Many small businesses struggle to make payroll or pay for expenses while waiting on net-90 invoices.

Although building the business is important, cash flow is just as important. When your customers seek extended payment terms, the result could have a negative impact on your cash flow. Your business has immediate expenses because of a sale, like payroll and material costs—but you won’t see payment from that sale for another three months.

The impact of cash flow

Cash flow is different than profit. A business can be profitable while experiencing negative cash flow.

Think of it this way: If you have three sales in one month totaling $100,000 with expenses for the same month totaling $75,000, you will have a $25,000 profit for the month. The expenses and payroll are due in the month that the expenses are incurred. However, your business will not realize the $100,000 in cash payment due until 30, 60, or 90 days (or more!) after the goods or services are delivered.

This scenario causes negative cash flow, even though your business will make a profit of $25,000. You need $75,000 for the cash outflow to cover the expenses. But you may not receive the $100,000 inflow of cash until three months later. How do you pay the overhead while waiting on the accounts receivable?

Research suggests that 8 out of every 10 businesses fail within the first 18 months, with poor financial management being one of the leading causes. One of the biggest mistakes a small business owner can make is to pay little attention to cash flow. Cash flow management is absolutely critical to the success of a startup or any small business.

Quick financing options

Keeping a positive cash flow can be difficult based on the patterns of your business.

You should have a plan not only to continually monitor your cash flow, but also to make adjustments when things go wrong—and they will.

Invoice financing or factoring

One option that can sometimes help is invoicing financing or factoring. There are many different types of factoring companies, and each one offers a slightly different product. But generally, invoice factoring is a way to use your unpaid invoices as collateral to get cash quickly through a loan. A factoring company will provide a percentage of your accounts receivable up front, almost immediately after an invoice is issued.

When the invoice is paid by the customer, the lender pays you the balance of the invoice, less any interest and fees. For the cost of the interest and fees, you get the cash you need, when you need it, to maintain a positive cash flow.

Invoice discounting

Invoice discounting, on the other hand, is a type of invoice financing in which you sell your accounts receivable to a third-party lender. The lender takes on responsibility for the accounts receivable and collects on any invoices due. You receive a percentage of the total invoices up front.

Due to this type of arrangement being an outright sale of the receivable, the fees are generally a bit higher.

Spot factoring

Even if you’re good at monitoring and maintaining positive cash flow, unexpected expenses or increased overhead can easily cause a small business to face cash flow problems. Spot factoring is a more specific option that many businesses keep in their back pocket for just that type of rainy day.

It provides a flexible safety net of sorts for small businesses. Instead of financing outright all or most of your accounts receivable, you can establish a relationship with a lender for single invoice (or “spot”) factoring. Acting as an insurance policy, this type of financing can be used in a cash flow crisis.

The advantages of spot factoring

Similar to a home equity line of credit, spot factoring allows you to establish an account that you can draw on based on a single invoice when needed. Financing percentage, fees, and interest are established with the lender and you can use this arrangement as needed to get cash immediately on an outstanding invoice.

The fees for spot factoring are typically higher than other types of invoice financing. Some lenders also require a certain amount of activity on the account within a quarter or a year, so you may have to use the option on occasion to keep from paying additional fees.

The advantage of spot factoring is that you do not have to sell your entire book of accounts receivable at one time. You maintain the flexibility to use the financing (or not) depending on your current cash flow situation.

The bottom line

Careful planning and monitoring of the cash flow situation is critical to any business’s success. It may be difficult for small businesses to wait for their invoices to be paid, and occasional financing may be necessary to maintain positive cash flow.

Invoice factoring and spot factoring are two options that will provide an immediate cash inflow based on your book of accounts receivable—so if you’re worried about an impending cash flow crisis, these are options you may want to consider.

AvatarRachael Grinnell

Rachael helps small businesses in her community that are experiencing growing pains solve their cash flow problems. You can read more of her work at Factoring Journal.