Businesses need cash to operate. It doesn’t matter if it comes from your own pocket, outside investors or a loan. It’s not unusual to fund your business with a little of each. You start the business with your own finances then seek additional funding as it grows.
There comes a point when you are ready to bring debt into the mix. Used correctly, debt is a powerful tool that allows you to leverage the limited capital you have. It’s difficult though to know exactly how to approach the issue. Many set an appointment with their bank to discuss a traditional bank loan.
Traditional bank loans are great if you’re purchasing a fixed asset such as real estate or equipment; however, traditional loans are suited for increasing your cash flow. Sure, you can use them to build a little padding to get your business through a rainy day, but it’s a really inefficient way to do so.
Moreover, you may find it difficult to even qualify for a traditional loan from a bank. This is especially true if you try to work with a large national or international bank. There’s that old addage about banks only giving loans to people who don’t need them.
Evaluating Alternative Financing
You may or may not know that there is an entire world of finance outside of traditional banks. There are financial products specifically designed to improve your company’s cash flow.
Why is cash flow so important?
Cash flow is what allows you to:
- Make payroll
- Purchase raw materials
- Keep vendors on favorable terms
- Make urgent payables like utilities and insurance
In other words, cash flow is what gives you the ability to keep your business running.
This increased cash flow is often accomplished through accounts receivable financing. There are a number of financial products that fall under this heading, but one of the most popular is factoring.
What is Factoring?
Factoring allows you to get cash as soon as you invoice. It cuts out the time it takes for your customers to pay. A factoring company advances a certain percentage against the invoice amount up front – usually 80% - then you receive the balance once your customer pays.
The factoring company will charge a small percentage of the invoice amount. Since the fee is tied to the invoices you factor, you are in direct control of the costs. Unlike with a traditional bank, you are the one who determines how much you pay for funding.
Benefits of Working with a Factoring Company
Factoring is more than a business loan. Working with a factoring company comes with a number of benefits that you won’t get with a traditional bank.
Risk Assessment
Very few businesses screen the credit quality of their customers before extending terms. It’s not because the business doesn’t care, most simply don’t have the resources to devote to the due diligence process.
A factoring company is relying on your customers for repayment. Because of this, they will evaluate the credit quality of all customers you wish to factor. This gives you insight into your customer base that you probably wouldn’t get otherwise.
Collection Services
What do you do when an invoice goes past due? Are you, as the business owner, personally calling to follow up? Are you paying someone on your team to handle collections? Your time and resources could be spent on more productive things if you didn’t have to worry about collections.
Factoring companies have resources devoted to handling collections. The factor bears the cost of these efforts, freeing you and your team to focus on more productive tasks.
Simplicity and Convenience
Factoring is incredibly simple and convenient. This is especially true when you use an online factoring company. Simple and convenient are two words you’ll rarely hear regarding a traditional bank.
Factoring is designed with the business owner in mind. It is a business loan that works for you, not against you.
