Selling Income Streams For
Quick Business Capital
Cash flows are streams of cash that come in and out of a business. That is a simple statement and although many business owners understand that they can sell their incoming streams, many don’t.
During this period of history where capital from bank loans has been harder to access there is still capital available from other sources. Selling an income stream can be very advantageous to both businesses that are struggling and those that are growing.
Income for a business comes from the products or services they sell, but there might also be income streams from notes they hold, mortgages payments they receive, royalties, annuities, settlements, etc. All of these are income streams that can be sold.
Selling an income stream creates immediate cash instead of waiting for the payment. It allows the business to use their cash in the most efficient and profitable manner. Many vendors offer a discount for early payment and this reduces the cost of inventory when the company has the ability to take advantage of paying quickly. Bulk purchases, paying off debt, etc., are benefits of having cash on hand instead of waiting on payments to be made 30, 60, or 90 days later.
Selling an income stream, which is an asset, differs from the company obtaining a business loan. Selling an asset is not a loan. New debt is not placed on the company’s Balance Sheet. The Funder will place their emphasis on the credit strength of the payor and not on the company selling the asset. This allows both young and unstable companies to receive financing that they cannot get from traditional sources. A business loan may take 60 to 90 days to close, if the company qualifies, and there may be many hurdles to jump and expenses to pay before knowing if they qualify.
In order for the finance company to make money for advancing the cash, they charge a fee which is usually a percentage of the cash flow they are buying. Many business owners have not considered selling their cash flow streams to increase their cash on hand and this could be because they either don’t understand the process, or they have the expectations the fees are to high.
Consider the example below and then complete some calculations using a fee rate between 2%-5%, and an advance of 70%-80% to determine if selling your income stream is a financially sound decision for your business. The amount of the advance and the fee charged will vary depending on the strength of the Payor and the typical amount of time it takes them to make the payment.
$500.00 Total amount to be received by the business in 30
$400.00 80% advance paid.
$100.00 20% reserve held by the finance company.
$12.50 2.5% fee deducted from reserve.
$87.50 Balance of the reserve paid to the business after the Funder has received payment.
$487.50 Total amount received by the business.
Now add in the benefits of using cash flow financing.
1. Do vendors offer a discount for cash/quick payment?
2. Is there an option of buying in bulk, or by contract, that reduces expenses?
3. Can money used for accounts payable tracking and collections be invested in production?
4. What expenses can be reduced when cash is available?
If the business is going to increase profits by using cash flow financing then the financing fee should be easy to absorb. If the company is going to miss out on sales and profits due to the fact current cash flow won’t support the increased inventory and man hours, selling an income stream provides the cash to accept more business. If using cash flow financing keeps a young or unstable business solvent and operational then this form of financing may be a necessity until the business is on a better financial foundation. If the business is not going to benefit, then don’t sell the income stream.
1. Garbage in garbage out. To receive the best benefit and an accurate quote make sure that any reports provided to a potential Funder are up to date and can be clearly understood. Confusion and uncertainty won’t provide the best results.
2. Calculate the difference between selling all, or only a portion, of the cash flow to determine the maximum benefit to the business.
3. For better rates, work with funding sources who specialize in and understand your industry.
4. Use cash flow financing as an opportunity to spend time on increasing sales instead of having the company’s time and staff consumed by collections and other billing obstacles.
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Cash Flow Funding Sources
Business Funding Secrets is putting together a list of Cash Flow Funding Sources. This will include Purchase Order Funders and Factors for manufacturing, transportation, medical, installment contracts, timeshares, notes (business, residential, auto, boat, plane), international, import/export, staffing, government contracts, royalties, annuities, etc.
If your company is a Cash Flow Funding Source, or a Cash Flow
Broker/Consultant, and would like a free listing included in the Business Funding Secrets resource list please e-mail your information to firstname.lastname@example.org .
Please include: type of funding provided, company name, address, phone, and URL. Please designate your company as a: funder (company that actually writes the check), or broker. Both will be listed, but if no designation is provided we will assume the company is a broker.