Cash flow issues plague almost every business at one time or another. There always seems to be a differential in the money coming in and that which you must send out, and usually, it isn’t in your favor. Unexpected expenses or seasonal slowdowns can contribute to the shortfall, but the biggest culprits are the slow-paying customers who wait until the deadline to pay up. When you use an invoice system to bill clients for services or goods provided, you may find that your cushion to fill the gap between payments isn’t quite enough. Take a look at factoring and accounts receivable financing as viable options to help.
Accounts Receivable Financing
When you seek a traditional loan, you typically need collateral to back it. In the business world, you can use your accounts receivables as the collateral to secure the funds you need to keep your doors open. To qualify for this type of financing, your collection rate on your receivables must meet a certain threshold, typically upwards of 75 percent or higher. A company will lend you money with this as backing should you be unable to pay in the future.
The lender does not intercept the payments for your invoices unless you default. You retain your accounts receivables and pay the lender directly. The interest rate charged on most of this type of financing is typically 2 percent depending on the lender, your business score and the amount you need.
When you don’t necessarily need or want a larger loan, you may consider going the route of factoring. In this process, a company called the factor will add up the amount of all your invoices in a given month. They will then give you a portion of that in a lump-sum. Instead of you paying the factor back, they take your invoices and collect directly from customers.
The factor company charges variable fees which may or may not be negotiable. Factoring is beneficial if you’re looking for a longer-term solution. You may make arrangements with the factor to do this monthly for as long as you need to get your cash flow stacked in the right direction.
Whatever way you choose to go, know that you have options. Accounts receivable financing is a traditional way to go using outstanding money to secure the loan. Factoring is more of a cash advance that then collects directly from your customers. Both have pros and cons, and using one over the other will depend entirely on your own business needs.