It is well known that a challenge for a new or growing business can be cash flow. The proprietor sees the opportunity for growth but his current cash intake is not sufficient to allow taking that next step. To top this off, raising money from investors can be extremely challenging, and banks are not willing to loan money in this risk adverse environment.
With the recent down turn in the markets funding for bio techs has started to dry up quickly. Bio techs must have cash to pay for the services of a Contract Research Organization (“CRO”) to perform the studies and provide the data to demonstrate their product.
CRO’s have another issue in this equation. The trend over the last couple of years has been for clients to extend payment periods from a traditional 30 days, to 45, 60 and even 90 days! Most of the work for a client on a study is completed in a few weeks at most. Payments are generally milestone based with 30-40% due at signing, another 20-30% at the start of the in-life portion of the study, 20-30% at the end of the in-life the remainder due at the submission of draft and final reports.
What does this mean to the CRO? Depending on the length of time between signing the study and getting started, the CRO may have completed most or all of the work (thus incurring nearly all of the cost) well in advance of receiving the first payment. The clients who want the longest terms are the largest in the industry and it is take it or leave it.
While income generated from work for smaller clients can help, it is not always sufficient to finance trying to get your foot in the door with the largest of clients. So what are your options if raising capital through investors and getting a bank to loan you money are not viable options?
Trying to play around with credit cards may provide some help with buying supplies, but this is only a small portion of the cost of a study – labor is the predominant cost and you cannot pay people with credit cards.
What if there was a way to get cash the cash you need now without even going into debt? How would you go about doing this? The answer is you find a party that is willing to buy your future receivables now at a small discount. It is not a loan and you assume no debt. The party (generally referred to as a factor) is actually buying the receivable or invoice. You get cash in hand now and the factor then waits the remaining days to collect the receivable.
An example is helpful. The CRO has an invoice payable in 30 days for $5,000.00. The CRO sells the invoice to the Factor for $4,500.00 cash. 30 days later the Factor receives the $5,000.00 for the invoice. The Factor keeps the $4,500.00 it already paid the CRO, plus a factoring fee of $50.00 and interest of $50.00 (1% and assuming the invoice is paid in 30 days). The net to the CRO – $4,900.00. So for a total cost of $100.00 the CRO got the cash it needed right away in order to pay its employees, buy supplies and to take on more clients.
If this sounds like what you need to grow your business, let us help. Contact us below and let’s explore potential cash flow solutions for your business.