What would happen if your largest customer was 30 days late in paying their invoices? Maybe you’re fortunate enough to have enough cash on hand to keep everything running; however, that isn’t the case for most small businesses.
Running a small business is a balancing act. You’re trying to pay expenses, fill orders, make payroll, deal with problems and grow your business all at the same time. If cash dries up and you don’t have an outside funding source, you’ll have a very difficult decision to make. Do you stretch vendors, delay payroll or cut off marketing?
None of those are attractive options. Fortunately, many of these issues are avoided with proper cash flow planning and an outside source of business funding.
How Does Business Funding Work?
Put simply, you put your business’ assets up as collateral and a lender provides funding based on the value of those assets -- the same way the mortgage on your personal residence works.
A specific type of business funding is cash flow financing, where the expected cash proceeds from those assets is used to repay the loan. Accounts receivable are the primary collateral in this type of loan.
To think of it another way, a lender is loaning you money on the basis that your assets produce enough cash to repay the loan through the normal course of business.
The loan may be structured so that you take advances under a revolving facility with your receivables as collateral or the accounts receivable may actually be assigned to the finance company. The latter form is known as factoring.
Using Factoring For Cash Flow Financing
Factoring is a great option for small businesses as it is much more flexible than a traditional bank loan. It also has a number of unique benefits since the factor is directly invoiced with your receivables.
One of the biggest benefits is the assistance a factor provides in account receivables management. A factoring company evaluates the credit quality of any customers you wish to factor. Proper underwriting up front saves a lot of time, energy and stress in the long run as fewer invoices end up uncollectable.
This leads to the second benefit, which is assistance with collections. Since your customers pay the factoring company directly, the factor is involved when collection efforts are needed on past due invoices. This alone saves you a tremendous amount of time and money.
Plan For Your Company’s Future
Often it isn’t that you don’t have the ability to get business funding, it’s that you didn’t plan far enough in advance. If it’s Tuesday and you need to make payroll on Friday, you’ll be hard pressed to find a lender that gets you funds in time. But if you plan several weeks or even months in advance, you’ll have a much easier time getting the funds you need.
Don’t wait until you’re up against the wall before you start looking at funding options. Don’t wait until vendors threaten to cut you off. Don’t risk losing good employees because you aren’t able to make payroll. Don’t lose the ability to be nimble when opportunities arise. Don’t go another day without planning out the financial future of your company.
Fast A/R Funding specializes in helping small businesses bridge the cash flow gap with factoring. Click below to learn more about the positive impacts on cash flow that factoring can have, or call 888.833.2286 to speak with one of our small business finance consultants.
