Business Funding

I certainly don’t know the specifics of your business. I don’t know where you’re located. I don’t even know what industry you’re in, but I can probably tell you what the biggest cash hog in your business is. It’s your accounts receivable.

Accounts receivable are an asset. There’s nothing inherently wrong with them. They indicate cash that you expect to receive in the future; however, they provide no immediate benefit.

Many business owners accept cash being tied up in accounts receivables as a fact. It’s just how business is done. You do a job, you invoice, and then you collect payment 30 or 60 days later. That waiting period is simply a cost of doing business.

The real fact is you have options. You don’t have to sit around, waiting for your customers to pay. You can leverage your outstanding invoices to receive business funding immediately.

Cash Flow Financing

Cash flow financing is a type of business funding that allows you to borrow against your accounts receivable. Rather than waiting 30 days for payment from your customers, you get cash immediately upon invoicing.

There are several different finance products that allow you to borrow against your accounts receivable. For small businesses, factoring is typically the best option while larger businesses may find traditional asset based lending to be a better fit.

That’s not to say that factoring is only for small businesses. There are also many multi-million dollar operations that rely solely on factoring. That’s because there are a number of unique benefits to factoring that you won’t find in a traditional bank loan.

Factoring for Business Funding

From a lender’s perspective, factoring is unique in that they’re directly relying on your customers for repayment. In traditional banking, your customers are important as well, but it’s indirect. Your customers are important in the sense of you staying in business to repay the loan; however, there’s no direct contact with your customers.

In factoring, the factor is sending invoices directly to your customer and the customer is paying the factor directly. If your customer is unable or unwilling to pay, it affects the factor directly. Due to this, factors are very concerned about the credit quality of your customers.

Account Receivables Management

Risk Assessment

A factoring company will underwrite any customers you want to submit for factoring. This provides a great benefit to you since you gain insight into the quality of your customer base. Whether you realize it or not, when you issue an invoice you’re essentially loaning money to another company.

You provide a product or service based on their promise to pay a certain dollar amount in a month or two. How confident are you that they will make good on that promise? Do you have any idea if your customer has the financial ability to pay that invoice?

When you work with a factoring company, you’ll quickly find out if you’re taking undue risk.

Collection Services

As I mentioned above, your customers pay the factoring company directly. The factoring company is tracking the age of the invoice and knows when to expect payment. If payment doesn’t come, the factor will start to follow-up to determine when the invoice will be paid.

This alone is a fantastic benefit. Many businesses have departments dedicated to collecting past due invoices. Paying someone for collections isn’t cheap, but with factoring it’s part of the package. You get the same effect of having a dedicated collections department without the cost. Working with a factoring company is like having an account receivables management company.

Flexibility

Factoring gives you flexibility unlike any other form of business funding. You aren’t locked in to borrowing a certain dollar amount. You aren’t locked into contracts for years. You aren’t paying interest on funds that you don’t need right now. You have the option to factor one or all of your invoices. This gives your direct control over your funding and your cost.

While it really isn’t a secret, factoring is a form of business funding that many people don’t know anything about, but it really is a fantastic way to unlock the value in your accounts receivable and get the cash you need today.