For CEOs worried about next month's payments: 5 things you must check before turning to factoring

1. A 'slight sense of unease' is the starting signal

One morning, I felt that the way I handled a call from my bank representative was slightly different than before.

On another day, a long-time business partner suddenly asked me to shorten the payment cycle.

I noticed myself checking my bank balance again every time the next payroll date approached.

Each of these might be trivial. But at night, I suddenly wonder.

'Could my company be in trouble?'

If you are feeling that sense of unease right now, I want you to read this article to the end.

That unease is probably correct. And if you act now while you have noticed it, there is still much you can protect.

As a former banker for 15 years and a business turnaround specialist for 10 years, I have accompanied over 300 small and medium-sized enterprises through business turnarounds. Throughout that time, I have often thought, 'If only they had consulted me a little sooner, there would have been more options.'

I want you to act before you fall into the period of despair, not after.

That is what I want to convey.

2. Why do many CEOs make the wrong decision here?

CEOs at the stage of 'worrying about next month's payments' still think they can 'manage it themselves.' Therefore, they put off consulting with outsiders.

And there are several common decision-making patterns among CEOs who fall from there into the period of despair.

First, they borrow money from relatives or acquaintances. They bow their heads and say, 'Please lend me some.' It might get them through temporarily. However, that does not solve the root problem. Borrowed money must eventually be repaid. And sometimes, it causes cracks in family and friend relationships.

Next, they turn to factoring. They fall for sales calls from companies that tout it as a 'convenient means of fundraising.' The first company might be okay. The problem arises the moment they start using a second or third company because their funds are still not circulating.

There is also delaying payments to business partners. This is directly linked to credit. Once trust is lost, it takes a long time to regain it.

Some CEOs also turn to personal credit card cash advances. They are supposed to be managing their corporate and personal finances separately, but here they get mixed up all at once.

All of these are temporary fixes, but they all pass the bill to the 'next month.' By the time you realize it, you are unable to escape the cycle of living hand-to-mouth. And by the time you finally go to consult a lawyer, your options have become extremely limited.

This is the typical pattern of falling from the warning period to the period of despair.

3. Check #1: Are you truly 'short on funds'?

When I talk to CEOs who feel they 'cannot make next month's payments,' I sometimes notice something surprising.

There are quite a few cases where funds are not actually depleted.

For example, there are cases where the only issue is a delay in collecting accounts receivable. You might have a profit on your financial statements but no cash on hand. In this case, the root problem is different, and it can be solved by accelerating collections or temporarily securing working capital.

There are also cases where fixed costs are abnormally high. This is a pattern where, despite generating sales, personnel expenses, rent, and lease payments are eating up all the profits. This can be improved by reviewing fixed costs.

As a former bank employee, when I lay out the financial statements, trial balance, and cash flow statement side by side, the true situation of the company becomes clear. The feeling of 'not having enough funds' and the factual numbers can sometimes be misaligned.

Therefore, I want you to check first: are you truly short on funds, or is another problem just appearing as a 'lack of funds'?

If you cannot grasp it yourself, it is best to have a third party who can provide an objective diagnosis look at it. This is not something to be ashamed of, nor does it mean you lack ability. As the scale of management grows, it is inherently impossible for a CEO to grasp all the numbers alone.

4. Check #2: Did the bank really 'refuse' you?

Among CEOs who think, 'The bank refused my request for additional financing,' there is another case I want you to reconsider.

It is the pattern where you simply communicated it the wrong way.

Bank employees have prerequisites for approving loans. They cannot act as an organization unless certain conditions—such as profitability, repayment prospects, collateral, and guarantees—are met. This is not the bank employee being mean; it is a structural constraint of the banking organization.

If you communicate by saying, 'I'm in trouble, so please lend me money,' the bank cannot act. Even if they wanted to, they have no material to write a proposal.

On the other hand, if you communicate by 'presenting a business plan and repayment sources, and proposing a rescheduling or refinancing,' doors may open. Or, if you make a concrete proposal like, 'I would like a three-month grace period on repayments, and I will take these measures during that time,' the bank employee can take that to their superiors.

During my time as a bank employee, there were many cases where I thought, 'I could have approved this loan if only it had been communicated differently.' It is a mismatch where the CEO feels 'refused,' while the bank employee feels, 'I couldn't support them even if I wanted to, given how it was communicated.'

When talking to bank staff, knowing what is required within their organization will change how they respond. Before you feel 'refused,' it is worth reconsidering how you communicate.

5. Check #3: What you should know before turning to factoring

Factoring itself is not a bad thing.

However, it is also true that a CEO's fate depends on the 'usage' and 'type' of factoring.

If you repeatedly use high-interest factoring, you will almost certainly fall into a cycle of living hand-to-mouth. Even if you can scrape by with your monthly cash flow using the first company, the commission fees will weigh heavily on the following month. I believe the moment you start using a second company to cover that is the entrance to a period of despair.

As a former banker and someone working in the field of business turnaround, I have seen many factoring company practices. Some are honest, but in reality, there are also transactions that take advantage of desperate CEOs.

On the other hand, properly structured factoring can be a powerful weapon during the turnaround phase. It is a valid option if used as a tool to fill temporary cash flow gaps within a healthy range.

I personally run a factoring business through an affiliate. However, this is positioned as a sound means of financing limited to clients we support in turnarounds using the 'second company' method.

The important thing is to pause before you take the plunge. Diagnose whether you should use factoring right now from a third-party perspective. It is not too late to decide after that.

6. Check #4: Why I want you to know about the 'second company' method while it is still early

The second company method is often thought of as a 'last resort for CEOs in the desperate stage who have been turned away by lawyers.'

It certainly functions as a last resort in many situations. However, it is also a method that significantly expands your options if you know about it at an earlier stage.

While you still have cash on hand, you can build a more flexible turnaround plan. The possibility of not having to completely sever relationships with business partners is also higher at an early stage. There are also more options for protecting your home while you are still in a position to act.

The range of options is completely different between 'the second company method after exhausting factoring' and 'considering the second company method when cash flow starts to get tight.'

The second company method is not an option that exists only as a last resort. I believe it is ideal for a business owner to know about it early on as 'one of the cards' in their hand.

Knowing about it versus remaining ignorant completely changes the timing and breadth of your decisions.

7. Check #5: Do not decide alone

Business owners are in a position that tends to be lonely.

Especially when it comes to cash flow, it is difficult to consult with family or employees. It is hard to tell your spouse or employees that the company is in danger. I have seen many CEOs who carry it all alone, sitting at their desks at night, tapping away at a calculator.

But deciding alone is the most dangerous thing you can do.

Just by introducing an objective third-party perspective, the view can change. You may realize that there were actually many more options than the ones you were thinking of in your own head.

Lawyers, tax accountants, former bankers, management consultants—each has a different perspective. Rather than asking who is the 'correct' person to consult, finding someone who fits your situation and having them listen to you is the first step.

The important thing is to have the 'courage to consult' while you are still in a position to act.

Once you reach the desperate stage, your options will narrow.

8. While you can still act now

The uneasy feeling that "I'm worried about next month's payments" is correct.

Now that you have noticed that unease, it may be your last chance to take action.

Review your numbers objectively. Change how you communicate with your bank. Do not use factoring lightly. Learn about the option of the "second company method." Do not shoulder the burden alone.

Start with whichever of these five you can manage. I want you to take action.

Taking action while many options are still available—I believe that is the only way to avoid falling into a period of despair.

It is too early to give up.

Or rather, there is no need to give up on anything yet.

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