Unlocking Cash Flow: How Factoring Empowers Business Buyers and Sellers

 In today’s competitive business environment, cash flow is the lifeblood of any growing company. For those buying or selling a business, effective cash flow management becomes even more critical. Whether you're purchasing a business and need funds to smooth the transition, or selling a business while maintaining operational stability, the ability to unlock cash flow can make all the difference.

This is where factoring comes into play. Factoring allows businesses to turn their accounts receivable into instant cash, helping bridge the gap between making a sale and receiving payment. https://youtu.be/kF4stTpkU08 

What is Factoring? Factoring is a financial solution that allows businesses to sell their accounts receivable (invoices) to a third-party company, called a factor, in exchange for immediate cash. If you’re in an industry where offering trade credit is the norm—like retail or wholesale—you may find yourself in need of quick liquidity. Instead of waiting 30 or 60 days for your customers to pay, you can sell those invoices and access cash almost instantly.

How Does Factoring Work? Imagine you’ve made a $100 sale to a client. Typically, you would ship your goods or provide your services, then wait for the customer to pay within 30 days. In the meantime, you still need to pay your employees, suppliers, and other operational costs. Here's where factoring steps in:

1. Sell Your Receivable: You hand over the $100 invoice to a factoring company.

2. Get an Advance: The factor gives you an upfront payment—say 80% of the value, or $80.

3. Customer Pays the Factor: When your customer pays the invoice (after 30 days), they send the payment directly to the factoring company.

4. Receive the Balance: The factoring company then gives you the remaining balance, minus their fee—let’s say 3%—bringing your total to $97.

It’s that simple. You’ve effectively received $97 for a $100 invoice, but you’ve gained immediate liquidity, allowing your business to continue operating smoothly while you wait for customer payments.

Why Do Businesses Use Factoring? Businesses that face rapid growth or deal with long payment cycles often turn to factoring as a solution to maintain their cash flow. If you’re in a B2B (business-to-business) environment where customers expect trade credit, factoring can help you avoid the cash flow crunch that can come with waiting for invoices to be paid. This is especially crucial if your business is scaling up quickly and needs funds for inventory, payroll, and operations.

The Costs and Benefits of Factoring On the surface, factoring might seem expensive due to the fees involved, which can range from 2% to 5% of the invoice amount. However, when you compare factoring to other financing methods—such as credit cards, which also come with processing fees—it may be a more cost-effective option in certain situations.

The true cost of factoring is often lower than the hidden cost of waiting 30 days for payments while trying to pay employees or suppliers. In fact, businesses often find that the ability to access cash quickly outweighs the factoring fee. Plus, factoring doesn’t add debt to your balance sheet, unlike loans or lines of credit.

Is Factoring Right for Your Business? Factoring is a great option for businesses that need to maintain positive cash flow, especially those in industries where trade credit is a common practice. However, it’s not for every business. If your customers are slow to pay or you have a large volume of invoices, factoring can provide the liquidity boost you need. But if your business already has a healthy cash flow, you may not need to use factoring as a financing solution.

Conclusion: Factoring is a powerful financial tool that can help businesses manage their cash flow more effectively, particularly for those in industries that rely on trade credit. By selling your accounts receivable to a factoring company, you can unlock immediate cash to cover operational costs, pay employees, and reinvest in growth. While it comes with a fee, the benefits of quick liquidity often make it a worthwhile option for companies that need to stay agile and continue their growth trajectory.

Be sure to join my email list if you’re not on it already at https://www.DavidCBarnettList.com 

Cheers!

Dave

Two years wasted. Most common mistake that will keep you from selling your business

 

***New Video Alert!

How do most small business owners end up posting ads that don’t sell their business?

They make the most common mistake that I see repeatedly.

They don’t understand the difference between the selling price of a business and the value of its cash flow.

In most cases, this is not the same number.

Most business brokers are clueless about this.

Watch right here: https://youtu.be/on4RmO0egMM 

Cheers

See you over on YouTube

David C Barnett

A Great Interview with the host of Not Your Average Financial Podcast Mark Willis

Episode 377: Real World Tips for Selling Your Business with David C. Barnett

How to Find and Convince Investors for a Large Rental Complex

Bill's question—how to secure $1.5–$2 million in investments for a 150-unit rental complex in Florida—is ambitious but achievable. To tackle this, here’s a structured breakdown based on practical experience and tried-and-true methods for pooling investor funds: https://www.youtube.com/watch?v=AA7JV3dRFao

Step 1: Understand the Financing Structure

Assuming a $5 million total project cost, the financing needs to balance leverage (debt) and equity (investor money).

• Leverage (Debt): Banks often lend a percentage of the property’s value, called the Loan-to-Value (LTV) ratio. For commercial properties, especially with no personal guarantees, expect an LTV of 50%-60%. For this scenario:

• Bank loan: $2.5 million (50% of the total)

• Remaining funds needed: $2.5 million (equity from investors)

• Equity (Investors): This $2.5 million is what you’ll raise by pooling investors into a Limited Partnership (LP).

Step 2: Create a Legal and Financial Structure

a) Set Up a Limited Partnership (LP):

• General Partner (GP): A corporation you control (e.g., BillCo Inc.) will act as the GP. It manages the project and assumes liability.

• Limited Partners (LPs): These are your investors. Their liability is limited to the money they invest.

b) Define Equity Split:

• As the GP, you’ll earn a share of the equity for organizing and managing the deal—commonly 10%-20%.

• Example: GP (you) gets 20% equity, and LPs share 80% based on their contributions.

c) Determine Investment Units:

• Break the $2.5M equity into manageable units for investors.

• Example: 250 units of $10,000 each.

• Flexibility: Adjust unit size based on your target investors (e.g., smaller units for retail investors, larger for institutional ones).

Step 3: Attract Investors

a) Identify Target Investors:

• High-Net-Worth Individuals (HNWIs): People with disposable income looking for passive real estate investments.

• Friends, Family, and Associates: Start with your personal network.

• Real Estate Syndication Platforms: Online platforms likely exist for this.

• Local Investors: Realtors, business owners, or retirees in Florida.

b) Prepare a Compelling Pitch:

• Financial Forecast: Show projected rental income, expenses, cash flow, and returns. Example:

• Rental Income: $1 million/year

• Operating Expenses: $500,000/year

• Net Cash Flow: $500,000/year

• Investor Returns: Estimate returns (e.g., 8%-12% annually) based on cash flow and eventual sale proceeds.

• Exit Strategy: Offer a clear timeline (e.g., refinance or sell in 10-20 years).

• Risk Mitigation: Highlight measures like professional property management and insurance.

c) Create Marketing Materials:

• Prospectus: A detailed document outlining the opportunity, financials, risks, and legal structure.

• Investor Presentations: A polished slide deck for meetings or webinars.

Step 4: Build Credibility

• Demonstrate Expertise: If you lack experience, partner with seasoned professionals (e.g., property managers, contractors).

• Leverage Past Success: Share examples of similar projects or smaller-scale deals you’ve managed.

• Secure Soft Commitments: Before finalizing the deal, get verbal commitments from potential investors.

Step 5: Close the Deal

a) Secure the Property:

• Identify the property and negotiate a purchase agreement with a 90–120-day closing period to allow time for raising funds.

b) Finalize the Partnership:

• Sign the LP agreement detailing roles, equity splits, and exit strategies.

c) Collect Investor Funds:

• Use a trusted escrow service to manage incoming investments until closing.

Step 6: Execute and Manage

• Property Management: Hire a professional firm or manage it yourself if experienced.

• Investor Relations: Provide regular updates and annual financial reports to maintain trust and transparency.

Addressing Investor Concerns

• Liquidity: Highlight that LP shares can be transferred, sold, or inherited.

• Risk: Emphasize due diligence, professional management, and conservative financial projections.

• Returns: Present realistic projections based on rental income and potential appreciation.

Final Thoughts

Bill, while this is a big project, breaking it into smaller, actionable steps—finding the property, assembling investors, and structuring the deal—makes it achievable. Start with a strong foundation: a well-researched financial plan, a credible team, and clear communication with your investors. With careful planning and execution, you can turn this ambitious vision into reality.

Be sure to join my email list if you’re not on it already at https://www.DavidCBarnettList.com 

Cheers!

Dave

I had a fantastic conversation with Jack Allweil Show

 

In this discussion we talk through some of the considerations of entering into the world of small business ownership and operation with David C. Barnett, author of Buying vs Starting a Small Business.

How business owners & Financial Planners FAIL with retirement plans

 

***New Video Alert!

Are you a business owner who plans to retire one day?

Are you a financial or investment advisor?

Watch and I’ll show you the Achilles Heel of your plans and how to make them better.

Most business owners who can’t retire FAILED to spot this problem and their advisors were never informed enough to point it out.

Watch right here: https://youtu.be/vNRvGircerk 

Cheers

See you over on YouTube

David C Barnett

Broker's demand proof of funds- Zero Down Guru Strategy Explained

 

Let’s go to the mailbag… Question: I've used some of your teachings to buy a business and I'm targeting deals around $10 million but this broker is asking for proof of funds before he sets up a meeting with the seller.  Any advice? thanks in advance, R. Can you guess what my advice might be? I’ll tell you. First, sketch out what a reasonable offer for the business might be and how much you’d usually borrow from a bank and the seller. You’ll be able to estimate how much of a down payment you need to do the deal. Then, show the broker somehow. You don’t necessarily need to send documentation. I’ll give you an example, back in my broker days, someone who showed me a bank balance on their online banking portal would be fine. You might need $100K to do the deal and I can see there is $125K in that account, fine. The purpose of the broker’s request is that they’ve likely been burned by people who have taken a ‘no money down’ guru program and have wasted their time before. So, I told this to R. and you know what?  He got right back to me! His answer… What if I tell him I am using asset financing i.e. inventory, revenue, A/R, etc? What does this line mean? You’ll notice there is no mention of a bank. Why? Because a bank would require some degree of down payment or balance sheet strength to do an acquisition financing deal. So, instead of a bank, R. wants to pledge the inventory and A/R as collateral to a lender who doesn’t care too much about cash flow. What does using ‘revenue’ as an asset mean? It means R. intends to pledge the company’s receipts to get a merchant cash advance. All of these leverage techniques have a much higher cost than bank financing. R’s plan is to get control of the company, leverage it up in this high-cost way and then give that money to the seller as the ‘down payment.’ Any balance will likely be paid with a seller’s note. This is ‘zero down guru 101’ stuff. It’s the kind of stuff you’ll pay a guru $10,000 to learn in their online ‘community.’ It just might work, however. Here’s what is required… The business broker needs to be inexperienced and uninformed -AND- the seller’s advisors need to be a bit dimwitted. An experienced person would realize that if this deal did happen that the resulting business would be highly leveraged and have an extreme cash flow demand from these short-term loans. Risk would be magnified on this already risky asset class. The quality of the guarantee and collateral of the seller note would be diminished by these debts. Not only would R. be gambling on super-duper awesome instant performance and growth, the seller too would be taking such a bet but may not likely know it. So, if the broker doesn’t understand this, then time and effort may be spent trying to do this deal. If a deal were agreed upon, then the second line of defense would kick in, the seller’s lawyer and accountant might be asked to give their opinions. These two would need to completely miss the signs of trouble in order to not warn the seller. So, what kind of seller might agree to this? One who is totally desperate, maybe. One who has no time left to find a better buyer, maybe. One who doesn’t want to take the time to liquidate the business themselves if they do understand fully what this buyer intends to do. This is why so many of the gurus say that you have to have the patience and fortitude to contact 10,000 business owners to find just he right one. The goldilocks seller! But maybe it’s a different kind of seller like this… One who has a crappy business that is losing money and can’t find a buyer… hmmm… Would this, in fact, be a weird reversal of karma? What if the business is sinking and the seller knows it and just wants out and other buyers have passed because of their due diligence revealing problems? In my experience, the ‘zero down guru’ folks are very concerned about doing deals and much less concerned about the ‘day 2 problem’ that I often speak about… actually operating the business and generating a good cash flow from it. This kind of seller could agree to R.’s deal, make him buy the shares, take the money and run! Who knows?!? I asked for a deal update if/when it ever happens. If you’re not broke and want to buy a business, then I would love to teach you how.  Head over to https://www.BusinessBuyerAdvantage.com and sign up for my online training program. Cheers David C Barnett

LIVE Jon Shell-Canadian Employee Ownership Trusts

 

Employee Ownership Trusts in Canada New Livestream guest- Jon Shell I’m happy to have Jon join me on a live broadcast. Jon built a PE-backed rollup in the veterinarian space and now is the Chair at Social Capital Partners, a Toronto-based organization with the goal of helping more employed people enjoy the benefits of business ownership. Tune in and as we’ll be discussing new rules in Canada regarding employee ownership trusts. This is a ‘must see event’ for people that might want to sell their company to employees. These new rules are based on concepts that have been available in the US and UK for quite some time and the conversation may also be interesting to viewers in those countries as well. Be sure to join live so that you can ask questions, replay will be available. We’ll be going live Monday November 18, 2024 at 12 PM Atlantic Time 11 AM Eastern Time See you there! David C Barnett

Can We Trust Business Broker Valuations?

Phil’s question about trusting business broker valuations touches on a common concern in the buying and selling process. Here’s an overview of how valuations work in this context and what factors can influence their reliability. https://www.youtube.com/watch?v=NQACN_PRIjQ 

The Role of a Business Broker’s Valuation

As a business broker, I’d often perform what’s called a “Most Probable Selling Price” (MPSP) evaluation. This assessment closely estimates the actual selling price, usually accurate within 5-10% of the final sale. Brokers use industry benchmarks and past sales data to inform this analysis. If the broker is well-trained and experienced, they are likely to provide a fair and realistic estimate. However, it’s critical to note that this estimate is not a final price tag; it’s a guiding figure to help set the asking price.

Asking Price vs. Actual Valuation

An important distinction in business sales is between valuation and asking price. A valuation is an objective analysis of a business’s worth, while the asking price is set by the seller. For example, if an MPSP analysis shows a business is worth $220,000, a seller might choose an asking price of $249,000 to allow room for negotiation, which is reasonable. But if the seller sets an asking price at $500,000, it’s likely beyond reasonable market value. Some brokers may list businesses at any price requested by the seller, leading to wasted time for potential buyers investigating overpriced listings.

Choosing the Right Business Broker

If you’re a seller and selecting a broker, look for membership in credible organizations like the International Business Brokers Association (IBBA), which indicates a commitment to ethical standards and proven methodologies. Brokers who follow the direct market data method, comparing similar sales in the same industry, typically offer more reliable valuations. However, if a broker acts on both valuation and sales, there may be a conflict of interest, especially if they’re driven by commission incentives. To mitigate this, some buyers hire independent valuation professionals to get an unbiased view. My team and I do these valuations for sellers all the time and you can learn more about it at www.HowToSellMyOwnBusiness.com 

The Takeaway

If you’re considering buying or selling a business, a knowledgeable, trained broker can give you a realistic sense of value—just be cautious about conflating the asking price with actual worth. Be prepared to negotiate and remember that all deals are flexible, with the potential for compromise that works for both buyer and seller.

Be sure to join my email list if you’re not on it already at https://www.DavidCBarnettList.com 

Cheers!

Dave