AR Funding: Keeping Pace as the Economy Improves
There’s no doubt that the economy is growing. A few days ago, the Bureau of Economic Analysis released the initial estimate of second quarter GDP data. The Bureau estimates that real GDP increased at an annual rate of 1.7% in the second quarter of this year. This is up from 1.1% in the first quarter of 2013. All together, the economy has grown at an annual rate of 1.4% in the first half of 2013.
Despite this being short of what most economists would like to see, many business owners see this as a positive. According to the 2013 U.S. Bank Small Business Annual Survey, 45% of business owners believe the U.S. economy is in a recovery. 41% of small business owners expect their revenues to rise this year.
You need to have a plan in place to keep pace as the economy improves. It’s been some time since we have seen economic expansion of any sort. Many businesses have forgotten what it’s like to operate in a period of growth. When new business comes knocking, will you have the resources to handle it effectively? AR funding is the perfect way to face the challenges of growth head-on.
The Challenges of Growth
Seeing your company grow is a great, but it comes with a set of challenges. When new orders come in and new opportunities arise, you need to have the resources on hand to accommodate the increased work load.
It’s often the case that you’re paying for these additional resources up front, long before you see the cash from this new business. Do you have a pile of cash in the bank to bring on additional staff or order additional raw materials while still having enough capital to keep your business running?
You’re going to be invoicing as soon as your product or service is delivered; however, it will be weeks before you‘re actually paid. AR funding acts like a bridge to get you over the gap from invoice to payment.
What is AR Funding?
AR funding is short for accounts receivable funding. It’s a form of cash flow financing that leverages your accounts receivable. Accounts receivable is the largest current asset on most businesses’ balance sheets. Normally, you have little control over the liquidity of this asset. You are at the mercy of your customers.
AR funding puts the power back in your hands. It gives you the ability to pull cash out of that asset that you can use to grow your business. You’re no longer sitting and waiting for your customers to pay.
How Does Accounts Receivable Financing Work?
Looking specifically at factoring, a form of AR funding geared towards small businesses, the process is very straightforward. You, the small business, assign your invoices to the finance company, called the factor, who advances a certain percentage against your invoice. Your customer pays the factor who sends the balance of the invoice to you, less their fee.
A typical arrangement might look like this:
- You assign your $10,000 invoice to the factor.
- The factor notifies your customer that the invoice has been assigned and that payment should be sent to the factor.
- The factor advances 80%, or $8,000, to you.
- Your customer pays the factor.
- The factor sends you the remaining $2,000 less their fee.
How AR Funding Benefits You
The primary benefit of factoring is its effect on your cash flow. You spend less time worrying about payroll and vendor payments and more time growing your business. You have leverage that puts you in places that your competitors can’t reach.
- Bid competitively on projects without the worrying if you have enough cash to complete the project.
- Negotiate discounts with your vendors.
- Quickly ramp up your business if demand increases unexpectedly.
- Move quicker than your competition to win new business.
Don’t Miss the Opportunity That Economic Growth Brings
As the economy continues to improve, don’t let limited funding hamper your growth. Put a plan in place now to ensure that you have the resources you need to grow your business in the months and years to come.