It is a simple fact: In order for small businesses to survive, they must have cash. We all know how you get the cash to successfully meet obligations: converting accounts receivables into cash.

Of course this is easier said than done. Unless you have COD terms with your customers there is a 30, 60 or even a 90-day window when it comes to collecting receivables.

The result in slower collection of receivables is cramped cash flow. The cramped cash flow then makes it difficult to pay your vendors, buy inventory and, most importantly, make that Friday payroll.

If you’re a business owner who is always actively planning and projecting your cash flow, then you have an idea of what revenues are generated, who’s making payments and how much is being paid. You do a really good job of staying on top of your company’s receivables. 

As part of your planning nature, you continually look for ways to improve cash flow and plan for any emergencies that may arise. There are various ways:    

• Find an investor who is willing to take a chance on your company
• Hope that your customers always pay you in a timely manner
• Take out a short-term business loan

Bringing in an additional investor could result in loss of ownership in the company. We all know how difficult it can be to collect receivables in a timely manner. The last option, taking out a short-term business loan, is really your most viable option.

What Is A Short-Term Business Loan?
A short-term business loan is typically extended to small businesses for up to 120 days. Short-term business loans really come in handy to bridge the gap between when an invoice is issued and when it is collected. Short-term financing also is helpful if you own a business that has multiple operating cycles or experiences seasonality.

Also, the nice thing is you’re not indebted to a financial institution for an extended period of time.

One of the more common varieties of short-term business financing is accounts receivable financing, otherwise known as factoring. Factoring is simply selling your accounts receivables relating to creditworthy customers to a third party known as a factor. Advance rates vary depending on factoring companies or banks but are typically around 80%. Once the invoice is paid to the factor, you get the remaining percentage back less applicable fees.

Some Helpful Tips
Here are some helpful tips when factoring invoices:

• Factor all of your creditworthy receivables. While there is a cost, it’s a small price to pay to have the cash on hand necessary to conduct your day-to-day operations.

• Consider ending quick pay discounts. Factoring gets the cash you need in hand. I’ve seen customers take advantage of the discount even if they’re paying outside of the required time frame.  

• If there are certain times when you need just a little cash flow help, you might look at factoring some of the receivables of your more creditworthy customers.  While they may normally pay their invoices quickly, by factoring these invoices you’re meeting your immediate cash needs while minimizing your factoring costs.

The Reality
Factoring just makes sense if you own a small business. You’re able to keep your payables current, make sure the inventory you need is on hand and meet that Friday payroll.

Fast A/R Funding specializes in helping small businesses bridge the cash flow gap with factoring. Schedule A Demo below or call 888.833.2286 to speak with one of our small business finance consultants.