Many business owners work hard to get their business off the ground and into the marketplace. Most have come to realize how important their clients are and the importance of being in a position to accommodate them how and whenever possible. Sometimes this includes areas such as providing flexible credit terms that’s suitable specifically for each individual client. In fact, many clients will not be able to stay in business without the extension of credit.
Thus many business owners can only generate sales from clients who require payment terms. What that means is that a great majority of the sales that take place today will not be paid for at least 30, 60 or even 90 days. This can create financial hardship for any business; particularly those who don’t have sufficient cash reserves to sustain themselves while they wait for payments from their accounts receivables.
As they are waiting for these collections based on the agreeable payment terms that have been put in place, it can be difficult to continue to operate a business when funds are tied up for one to three months. The solution? Accounts Receivable’s factoring. It is one of the best solutions that businesses can have who are waiting to be paid from customers but don’t qualify for traditional lending.
Below is a case study of how Invoice factoring solutions works and how GoKapital can be instrumental in helping the business used in this example address their cash flow issues while they’re waiting to collect cash from their outstanding accounts receivables.
For the sake of this case study we will use the XYZ Company as an example of how GoKapital can assist them with their invoice factoring solutions.
Company Background and Building the Case
The XYZ Company is a B2B trucking and freight business. They transport large equipment and other items for various companies on the East Coast. They have cash reserves in the amount of $25,000, monthly sales in the amount of $250,000, their payroll and operating expenses are $175,000 but their Accounts Receivable’s balance is $200,000.
What this means is that the majority of their cash is tied up in receivables that are not due for another 60 to 90 days. Although their customers are in good standing and pay on time, they experience cash flow difficulties as they’re waiting for funds from their Accounts Receivables to come in. Their current cash position is laid out below.
CURRENT CASH POSITION
Cash Monthly Collection Accounts Monthly Operating
Reserves Sales on Sales Receivables Payroll Expense
$25,000 $250,000 $50,000 $200,000 $50,000 $125,000
REMAINING CASH AFTER EXPENSES: ($100,000)
Based on the scenario provided above, the XYZ Company will be experiencing a cash shortage in the amount of -$100,000k which will make it difficult to operate their business. Although they continue to generate sales, they typically only collect on 20% in cash and the remaining amount is put on the books as receivables.
The XYZ Company has not established itself financially and thus has a few credit issues that they are working on. In the meantime, they do not qualify for traditional lending, yet need to find solutions to deal with their monthly cash flow issues that continue to arise on an ongoing basis.
In order for the XYZ Company to secure additional business, they need approximately 45% of their revenue that is generated to cover the costs associated with fully servicing new clients. This is difficult to do when they have cash shortage issues each month.
The owners have often had to take second mortgages on their personal homes to cover some of the cash shortages. This has created an additional drain on the company and the owners as whole.
The XYZ Company is in need of an immediate cash infusion of $100,000. This will relieve them of their immediate cash shortage issues and allow them to perform business at full operation while they’re waiting for payments from their outstanding accounts receivables.
The Advantages of Factoring and How GoKapital Solved the Problem
GoKapital can assist the XYZ Company through their invoice factoring services, which they offer to a wide variety of industries. This includes freight and trucking companies as well as B2B businesses. They provide just in time cash advances against outstanding invoices for as much as 90% of the original invoice.
They’ve allowed their invoice factoring services to serve as an alternative to traditional lending for companies that are operationally strong, but do not qualify for traditional lending. They provide approval within 24 hours and are known for assuming the role as a financial partner, as in the case of The XYZ Company.
GoKapital was able to offer the XYZ Company the full $200,000 at a discounted rate of 10%. That means that the XYZ Company was advanced a total of $180,000 immediately and GoKapital will collect the full $200,000 in receivables over the next 60 to 90 days.
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How the XYZ Company Benefited From Factoring Services
After the factoring services have been provided by GoKapital, The XYZ Company was able to use the funds to cover their operating expenses, including payroll and add more money to their cash reserves. Their new financial picture consist of the following:
CURRENT CASH POSITION
Outstanding Cash Cash Monthly Collection Accounts Received Monthly Operating Reserves Sales on Sales Receivables from Factoring Payroll Expense
$25,000 $250,000 $50,000 $200,000 $180,000 $50,000 $125,000
REMAINING CASH AFTER EXPENSES: $80,000
They can now work towards obtaining enough working capital to and service new business and increase their overall cash flow position.
How GoKapital Helped the XYZ Company Transition into a Financially Stable Company
Because GoKapital could see the potential in the XYZ Company, they agreed to continue to act as their financial partner by making AR factoring services available to them on an as needed basis.
As a result they were able to pay their suppliers on time, acquire new business and solidify their financial position. They now qualify for more lending opportunities, which lowered the cost of debt associated with factoring invoices.
Thankfully GoKapital was also able to become involved in this new phase of XYZ Company’s business as GoKapital also offer additional lending alternatives as well.
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