How Turnaround & Restructuring Professionals Use Invoice Factoring as a Liquidity Management Tool

Most businesses at some point in their lifecycle will face issues with financial distress and underperformance. In extreme cases, they may result in a situation where outside consulting services are needed to implement a turnaround strategy. Turnaround strategies are typically centered on accelerating and stabilizing cash flows to give the business time to reduce expenses, grow revenues and restart momentum.

For turnaround and restructuring professionals looking to help their clients manage these issues, one practical solution is invoice factoring.

Factors Driving Demand for Turnaround Management Services

Turnaround management and restructuring services are becoming increasingly popular for several reasons. One of the primary reasons is that businesses are facing more challenges than ever before including, business slowdowns, adverse market conditions, inability to obtain financial resources, long periods of restrictive monetary policy and high interest rates, insufficient cash flow, high inflation, supply-chain disruptions, natural disasters and public health emergencies, ineffective management, and declining profitability.  

In August 2023 alone, commercial bankruptcies rose by nearly 17% compared to July. According to Scott Stuart, CEO of the Turnaround Management Association (“TMA”), the latest increase in bankruptcies is in large part a “return to normal” after an “unnaturally long period of easy money.” 

Another reason for the increase in demand is that professionals in this industry have a proven record of success. Turnaround management professionals are highly experienced in financial management, strategic planning, and helping distressed businesses overcome their challenges. Furthermore, turnaround management services are more accessible and affordable than ever making it easier for business owners to get the help they need.  

Helping Distressed Businesses

Turnaround management is dedicated to the process of business renewal.  Professionals and consultants within this industry work with companies whose business model is not working, to develop and implement plans to stabilize them and return the business to solvency.  In addition to distressed and underperforming companies, services can be for ones that have grown too rapidly, such as with successful startups.

Turnaround management is an intricate process requiring careful planning and implementation. It usually entails reorganizing leadership, processes & procedures, and the finances of the business. The primary goals of these services are to identify the root cause of the problems, develop a strategy to address it, and implement the plan as quickly and efficiently as possible.

The most critical area to work on is cash and liquidity management in order to buy time for business restructuring and allow for operational, personnel, and policy and procedural changes to be implemented.

Invoice Factoring as a Liquidity Management Tool

Invoice factoring is a financial service that allows businesses to convert their unpaid accounts receivable into immediate cash through a third party known as a factoring company. By selling their account receivables, businesses can receive immediate cash instead of waiting for their customers to remit payment on invoices.  

It can be used as a liquidity management tool to help stabilize and accelerate cash flow, as well as unlock much needed working capital that is tied up in customer invoices. This provides access to instant cash flow to pay off outstanding debts or lines of credit and provides much needed working capital. 

Invoice factoring can be used along with other liquidity management tools including, cash flow forecasting, optimization of working capital, enhanced supply chain finance, and diversification of funding sources to stop the hemorrhaging of cash, accelerate cash flow, and build a liquidity buffer.

Advantages of Using Invoice Factoring as Part of a Turnaround Strategy

The advantages of using an invoice factoring program, include:

• Accessibility: Having immediate access to cash flow with no additional debt appearing on the balance sheet can greatly improve operational liquidity and reduce the business’s financial risk.  
• Ease of Approval: The approval process is faster than obtaining a loan from a bank or other traditional lender and is primarily based on the financial strength of the business’s customers, not the financial profile of the business.
• Predictability and Stabilized Cash Flow: Many businesses choose to use invoice factoring because it can provide a predictable and immediate cash flow.  It also helps businesses experiencing financial issues caused by seasonality.  The cash flow can help a business pay debt or expenses, cover payroll, or funding growth opportunities. 
• Flexibility and Control: Businesses can factor all their invoices or only specific ones. “Spot factoring” can be used when a businesses has invoices that they want to turn into immediate cash without a long-term agreement. 
• Scalability of Funding: Practically unlimited business funding that scales with business growth.
• Early Payment Discounts: Reduces expense as the business can take advantage of vendor discounts by paying early.
• Purchase of Quantities Eligible for Discounts: Increases gross margins as the business is able to take advantage of supplier volume discounts.
• Additional Sales Volume and Increased Profit Margins: Gives businesses the cash flow they need to accept orders they might otherwise would decline.  These additional revenues can boost profits and cash flows without the need to increase fixed costs.
• Reduction of Debt Load:  Can eliminate or significantly reduce long-term liabilities or expensive lines of credit and improve debt ratios. Unlike traditional loans, invoice factoring does not add to a business’s debt load. 

Customized Solutions Are More Effective

Effective liquidity management plays a vital role in optimizing the financial health and operational efficiency of any business. Liquidity management helps the business to navigate a complex web of cash flow requirements and ensure the availability of business funds, which is key to achieving stability and fostering growth.

This is one of the reasons more businesses are turning to Capstone. Regardless of the business’s situation, their financing needs are not the same as every other business. Capstone doesn’t take a one-size-fits-all approach since every business operates differently and has different cash demands. We take the time to understand their business model, their goals, and their overall financial situation. We work with turnaround and restructuring professionals to develop a customized solution for their turnaround plan. 

Invoice factoring is a proven short-term (or long-term) turnaround management tool that has been employed in many successful turnaround plans. Working with an experienced factoring company such as Capstone will ensure optimal success and benefits of an invoice factoring program for your clients.

Let us work with you to find the best liquidity management strategy. Contact our skilled team of representatives today.