Accounts Receivable Financing Case Study

Accounts Receivable Financing Case Study

American Staffing, Inc. Case Study

This case study shows how Accounts Receivable Financing can be used to solve the cash flow problems of a staffing company. To protect client privacy, we have changed some details (including their name) in this business case. Also, the numbers have been simplified to make the case study easy to understand, but the key facts and lessons remain.

The Challenge

American Staffing, Inc. (ASI) is a staffing company that matches large corporate clients with qualified candidates to fill open positions within the corporation. Although ASI is a small company with just a few employees, they have secured three large contracts. However, between start-up costs, payroll, and operating expenses, the company only has $10,000 left in the bank.

Their three contracts each pay $100,000 per month for services, but the invoices are paid 30 days after services have been delivered. The company’s payroll is $150,000 per month and an additional $30,000 dollars per month is spent on other general business expenses. The table below provides a simplified snapshot of ASI’s financial position:

Before AR Financing Case Study

Although the company is doing relatively well, it is low on cash and won’t be able to meet their general expense and payroll liabilities, causing them to have a cash deficit of $170,000. ASI will have money coming in as soon as their invoices are paid, but in the meantime, they are unable to meet their expenses.

Solving the Problem with AR Financing

ASI could solve their current cash flow issue with a business loan, but there is a problem with this approach. Banks don’t usually provide financing to small companies unless they have substantial collateral and a track record of profits, ASI has neither. Also, getting bank financing can often take a while. This won’t help a company that needs funds quickly.

AR Financing can solve the problem by financing slow-paying invoices from credit-worthy commercial clients. This solution allows ASI to turn a portion of their slow-paying receivables into immediate cash, usually up to 90% of outstanding invoices is advanced to the client. The remaining 10% is held as a reserve until the invoices are paid in full. At that time, the transaction settles.

The following table shows a summary snapshot of ASI’s financial position after Accounts Receivable Financing has been deployed.

Immediately After AR Financing Case Study

The first thing to notice is that the cash deficit turned into a cash surplus of $100,000. The $30,000 held as reserve will be returned, less the finance fee, once ASI’s customers pay the invoices. The company now has enough cash to pay its operating expenses and payroll.

The Biggest Benefit - Growth

The biggest benefit from this transaction is not immediately obvious from the post-AR Financing snapshot. ASI previously had been unable to take on new clients, even though demand for their services were high. They simply could not afford to offer commercial credit terms to their new clients, mainly because it would require an increase in employees and associated general expenses. Unfortunately, growth was not an option, and even survival was questionable.

However, Accounts Receivable Financing changed their circumstances. After implementing the financing facility, they were able to take on two new clients, which increased A/R by $200,000. ASI was able to easily pay for the increase in payroll and other expenses thanks to their AR financing line. The following table shows a summary snapshot of ASI’s growth financial position.

AR Financing Growth Case Study

Why did AR Financing work so well for ASI?

ASI was able to achieve a financial turnaround relatively quickly using Accounts Receivable Financing. The company had a number of things going for it which helped this happen.

First, the company was well run and very profitable from the start. As is shown clearly in the second table, they had a sizable cash surplus after the first financing transaction. In fact, if they had chosen to stay at their current size, they could have stopped using AR Financing soon after building an adequate reserve – a process that would have taken less than a year.

ASI also worked with three large corporate clients, all well-known, brand-name companies who had great commercial credit. This simplified the process of financing their invoices because the collateral was excellent.

Above all, ASI’s management was smart. They were able to leverage their AR Financing line into a growth tool that allowed them to take on new clients. It wasn’t long before they were only financing invoices from new clients, as they no longer needed funding for their initial three clients. Basically, AR Financing allowed them to finance their growth.

Transitioning to the Bank

The one challenge for ASI was that the cost of Accounts Receivable Financing was higher than the cost of more traditional financing options, like a business loan. This was not an issue when they had a cash flow emergency and AR Financing was their only option. However, management was smart and used their receivables financing line as a stepping stone to traditional financing. Within two years, ASI was able to meet the underwriting requirements of a bank and secured a sizable line of credit. They used the line of credit to replace the AR financing line, which further increased their profitability.

Learn more about Accounts Receivable Financing with SouthStar Capital!


The Cost of Invoice Financing

Cost of Invoice Financing
Cost of Invoice Financing

Have you ever considered invoice financing, but thought the cost would be prohibitive? Well, maybe the question should be what is the cost of not financing your invoices? If you’re turning down a large job or contract because you don’t have enough working capital, think about the associated revenue your business is missing out on. Consider not just the lost opportunity cost, but also the growth opportunities your business is missing due to a lack of cash flow.

With invoice financing, we advance up to 90% of your outstanding invoices, so you get the capital you need right when you need it. Our funding decision is based on the credit quality of your clients that owe on the invoice, not your credit score. Once the invoice is paid, we remit the balance back to you, minus our fee. There’s no lump sum loan amount to repay or minimum monthly payments to make. Invoice financing simply gets you your money faster, providing you payment within 24 hours of submitting your invoice for your delivered product or service.

SouthStar is more than just a source of steady capital. You can also think of us as your accounts payable and accounts receivable departments. We’ll handle your billing and keep up with which customers have paid and which are outstanding. This is at no additional cost and saves you from hiring office staff to do the job. We also provide credit checks on your new clients to ensure the credit-worthiness of your new prospects.

Contact us today to learn more!

5 Reasons to use Invoice Financing to Grow your Business

Grow Your Business with Invoice Financing

The 5 reasons to grow your business with Invoice Financing.

Grow Your Business with Invoice Financing

Easier Qualification

Qualifying for a bank loan can be strenuous and time consuming, especially if you have a challenged credit history. Invoice Financing is different, in that the qualification process is based on your customers’ credit, not your own.

Get Paid Faster

Why should you have to wait 30, 60, or even 90 days to get paid by your customers? Invoice Financing allows you to unlock the cash within your business immediately, making growing your business easier.

Add Flexibility

Invoice Financing is a means of accelerating payments you’ve already earned. You can choose to finance invoices as you please, and there’s no restrictions on the amount of invoices you submit. You can also use your financing as you see fit, whether it be to order new materials, purchase new equipment, or meet payroll.

More Affordable

Compared to alternatives, such as merchant cash advances and title loans, Invoice Financing is an inexpensive way to fund your business. No extraneous fees, just a set rate.

Receivables Management

Working with an asset based lender, like SouthStar, helps reduce the various expenses associated with processing invoices and collections. We will handle your collections, so you can concentrate on managing your business and not having to worry about day-to-day accounts receivable.

Why Invoice Financing may be better than a Business Loan

Invoice Financing vs Business Loan

Invoice Financing may be better for your
company than a Business Loan.

Invoice Financing vs Business Loan

According to The Service Corps of Retired Executives (SCORE), 82% of start-ups and small businesses fail because owners have a poor understanding of cash-flow management and lack the ability to access working capital needed for growth.

One funding option that is often overlooked is invoice financing. This alternative lending method does not have the same strenuous requirement process as a traditional business loan. The main qualification is that a company has customers with outstanding invoices that are paid on terms. Below, we will take a look at why invoice financing might be a good fit for you.

Invoice Financing means...

Navy Triangle

No Debt Added

Invoice Financing doesn’t require a company to take on additional debt or have the pressure of paying back debt. The less debt acquired, the better your balance sheet, financials, ratios and investor perception. It also allows companies to receive needed capital without the hassle and risk of a loan.

Quick Funding

If a company needs money fast, there are few better options then invoice financing. In 2-3 days, a company can receive up to 90% of their outstanding invoices. After initial funding, capital can be provided within 24 hours.

Simplistic, Fast Process

In order to receive a bank loan, a company has to provide all of their financial statements, have very good credit, and have been in business for a good amount of time, generally more than 3 years. In contrast, invoice financing lenders are mostly concerned with the credit of the entity (debtor) that owes on the invoice, or your customer. This non-traditional approach takes a lot of pressure off the company in need of money.

No Debt to Payback

Because the money advanced is not a loan, it does not have to be paid back. As a result, there are no payments, principal, and interest to be made. The invoice is paid back by your debtor when payment is due and they receive no hassle about early payment, in turn increasing customer satisfaction.

3rd Party Handles Collections

Most Invoice Financing lenders will also handle collection duties for all invoices (even invoices not being financed). This service can provide huge savings for your company, as well as the ability to concentrate on managing your business and not having to worry about collections.