How can I grow my business without running out of cash? It is one of the most important questions a business owner can ask. Growing sales sounds like a good problem to have, but rapid growth can actually create serious cash flow problems.
A company may have more customers, more orders and more revenue than ever before, yet still struggle to pay employees, purchase inventory, cover operating expenses or take on its next big opportunity.
The reason is simple: revenue is not the same as cash flow.
When a business sells to customers on Net 30, Net 45 or Net 60 payment terms, the company may have to wait weeks or months to receive payment after completing the work. Meanwhile, payroll, rent, insurance, suppliers and other expenses still have to be paid on time.
For many growing businesses, managing this gap between earning revenue and collecting cash is the key to sustainable growth.
Why Does Business Growth Create Cash Flow Problems?
It may seem strange that increasing sales can create financial pressure. However, growing companies often have to spend money before they collect money.
Consider a staffing company that wins a new contract requiring 20 additional employees. The company may immediately need to hire workers and meet weekly or biweekly payroll requirements. However, its customer might not pay the resulting invoices for 30 or 60 days.
The staffing company is profitable on paper, but it still needs cash to fund payroll.
The same problem can affect manufacturers, distributors, oilfield service companies, contractors, telecommunications companies and other businesses that invoice customers after providing products or services.
As sales increase, accounts receivable increase. If collections do not keep pace with sales, the amount of cash tied up in outstanding invoices can become substantial.
This creates what is often called a working capital gap.
What Is a Working Capital Gap?
A working capital gap is the period between when a business has to pay its expenses and when it receives payment from its customers.
For example:
Monday: Your company completes $100,000 of work.
Tuesday: You invoice the customer for $100,000.
The invoice has Net 45 terms.
Your employees and suppliers need to be paid during those 45 days.
The customer eventually pays the $100,000.
Your company made the sale, but the cash is not immediately available.
If you only have $25,000 in the bank, the additional $100,000 sale does not necessarily make your immediate cash position stronger. In fact, it could make your cash flow situation more difficult.
This is why cash flow management is essential for growing businesses.
How Can a Business Improve Cash Flow While Growing?
There are several strategies business owners can use to improve cash flow without slowing growth.
1. Understand Your Cash Conversion Cycle
Start by determining how long it takes your company to turn a sale into collected cash.
Look at:
- How quickly you deliver products or services
- How quickly you invoice customers
- Your customers’ payment terms
- Your average collection time
- How quickly you must pay employees and suppliers
If you are paying expenses significantly earlier than you are collecting customer invoices, you have a cash conversion problem that needs to be addressed.
2. Invoice Customers Immediately
One of the easiest ways to improve cash flow is to eliminate unnecessary delays in billing.
If a job is completed on Monday, do not wait until Friday to send the invoice. Every day between completing the work and sending the invoice potentially delay payment.
Make invoicing part of the operational process rather than an administrative task that gets handled when someone has time.
3. Monitor Accounts Receivable Closely
Outstanding invoices represent money your business has already earned but has not yet collected.
Business owners should regularly monitor:
- Current receivables
- Past-due invoices
- Average days to payment
- Customer payment history
- Concentration among major customers
- Changes in customer payment behavior
A growing accounts receivable balance can be an early warning sign that cash flow may become a problem.
4. Negotiate Better Payment Terms
Whenever possible, consider whether your customers’ payment terms make sense for your business.
If you are paying employees every two weeks but your customers have Net 60 terms, your business has to finance payroll for a significant period of time.
You may be able to negotiate shorter payment terms, deposits, progress payments or partial upfront payments.
However, large customers often have established payment policies that are difficult to change. That is where other working capital strategies may become important.
What Is Invoice Factoring?
Invoice factoring is a financing solution that allows a business to access cash tied up in outstanding customer invoices.
Instead of waiting 30, 45 or 60 days for a customer to pay, a factoring company can advance a significant portion of the invoice value shortly after the invoice is issued and verified.
The customer ultimately pays the invoice according to its normal payment terms. The factoring company then remits the remaining amount to the business, less the factoring fee.
For example, suppose your company has $100,000 in eligible invoices outstanding.
Rather than waiting 30 or 60 days to collect that $100,000, your business may be able to access a substantial portion of the invoice value immediately through factoring.
The exact advance amount, fees and structure depend on the factoring company, the customer and the specific transaction.
Why Do Growing Companies Use Invoice Factoring?
The biggest advantage of invoice factoring is that it can convert accounts receivable into working capital without requiring the business to wait for customers to pay.
That can help a company:
- Meet payroll
- Purchase inventory
- Pay suppliers
- Accept larger orders
- Hire additional employees
- Take on new contracts
- Manage seasonal fluctuations
- Fund expansion
- Take advantage of growth opportunities
For some businesses, the ability to access working capital quickly can make the difference between accepting a new opportunity and turning it down.
Is Invoice Factoring a Loan?
One reason business owners consider factoring is that invoice factoring is structured differently from a traditional business loan.
With a conventional loan, the business generally borrows money and repays the principal and interest according to an agreed schedule.
Factoring involves the business’s accounts receivable. The factor provides an advance against eligible invoices and is repaid when the underlying customer invoices are collected.
This distinction can be particularly important for growing businesses that may not qualify for traditional bank financing or do not want to take on additional conventional debt.
Can a Business Factor Invoices With Slow-Paying Customers?
Potentially, yes.
Factoring companies generally evaluate the creditworthiness and payment history of the customers whose invoices are being factored. A business may have strong customers that pay reliably even if the business itself has limited financial history or less-than-perfect credit.
This is one reason factoring can be attractive to certain small and growing businesses.
Instead of focusing exclusively on the business owner’s personal credit or the company’s balance sheet, the factoring company can place significant emphasis on the quality of the company’s accounts receivable.
What Should Business Owners Look for in a Factoring Company?
Not all factoring companies operate the same way.
Before choosing a factoring company, business owners should understand:
- Pricing: Make sure you understand the factoring rate, fees and any additional charges.
- Advance rate: Determine how much of each eligible invoice will be advanced.
- Contract terms: Understand the length of the agreement and termination provisions.
- Customer requirements: Ask which types of customers and invoices qualify.
- Funding speed: If cash flow is the reason you are factoring, the funding process matters.
- Customer service: You should have access to people who understand your business rather than relying exclusively on an automated system.
- Transparency: Make sure there are no unexpected fees or confusing pricing structures.
A factoring relationship should be a financial tool that helps your company grow—not something that creates additional uncertainty.
The Bottom Line: Growth Requires Working Capital
Growing sales is exciting, but sales growth without adequate working capital can put a business under tremendous financial pressure.
The goal is not simply to increase revenue. The goal is to build a business that can profitably grow while maintaining sufficient cash flow to support that growth.
Business owners should monitor their cash conversion cycle, invoice promptly, manage accounts receivable carefully and develop a plan for financing working capital before a cash shortage becomes an emergency.
For businesses that sell to creditworthy commercial customers on payment terms, invoice factoring can provide an effective way to unlock cash tied up in accounts receivable.
At American Receivable, we have been helping businesses manage cash flow and turn outstanding invoices into working capital since 1979. We work with companies in a variety of industries, including staffing, manufacturing, distribution, oilfield services, telecommunications and other business-to-business industries.
If your company is growing faster than its cash flow, the problem may not be a lack of sales. You may simply have too much money tied up in accounts receivable.
The right working capital strategy can allow you to use that money to fund payroll, purchase inventory, accept new contracts and continue growing—without waiting weeks or months for your customers to pay.
