How do you finance your business growth?

Many entrepreneurs running small and medium-sized businesses have found that corporate and personal credit cards can be a viable financing tool. They provide the purchasing power for a small business as it finances the gap between selling their products or services and being paid for them.

Corporate credit cards invariably have higher spending limits than personal credit cards. While this seems to be a good thing, corporate credit card users should note that some card issuers report their corporate credit activity together with their personal activity, thus distorting their personal credit picture. Looking at their personal credit picture might lead one to think that as an individual they are grossly over-extended — not good for the individual or their business.

Another potential credit card ‘trap’ is that it becomes too easy to use the card and run up what quickly becomes permanent debt in the company. The cards get maxed out and the company is left with a solid core of high interest debt to be serviced on a monthly basis. If the business is growing rapidly there will usually be little opportunity to pay down that credit card debt, as the ongoing growth requires more working capital to fuel that growth.

An alternative funding approach to consider is invoice discounting (also known as spot factoring). This funding approach provides the working capital needed when, and as, it is needed. From a mechanical point of view, invoice discounting is quick and straightforward. There is a minimum of paperwork. Typically, as an invoice is produced and the goods are shipped, the document is purchased by the invoice discounter and the discounter releases cash to the company, usually within a matter of hours. The company (the supplier) and the invoice discounter work together in terms of the administration and collection of the purchased receivable. This ensures there is no disruption in the valuable supplier-customer relationship.

Invoice discounting does not represent a loan, as is the case of a credit card, and is very much ‘off balance sheet’ funding.

The need for additional working capital comes from the delay between issuing invoices and being paid. The invoice discounting approach speeds up the cash flow so that sales essentially become ‘cash on delivery’. This means that a business is utilizing their existing assets in a more productive manner without adding a debt burden to the company.

Growth will always demand more capital — the successful entrepreneur is the one who finds that all-important cash without going into debt or being constrained with burdensome service contracts. Invoice discounting may be the winner over credit cards.

Daryl Turko is owner of The Interface Financial Group, Calgary, AB, a provider of invoice discounting services.