When your business is in a cash crunch, there are very few practical ways to get funds without incurring debt. Over the years, taking out a loan has been the only method preferred by business owners, since there were few alternatives available to them. Now things have changed, and the same old approach for commercial financing is no longer the option, specifically for small and medium businesses. With banks not lending money as readily, it has become quite difficult for businesses to get working capital for daily business expenses. This is frustrating for businesses as lack of funds causes them to struggle to meet their short term obligations. As a result, these companies can’t capitalize on growth opportunities and remain stagnant. Some even contemplate shutting down their businesses. Before taking such extreme steps, companies should look for secondary financing options to bring cash flow back into their businesses. One of the most feasible options in this context is accounts receivable financing.
If you own a small or medium size business and are able to deliver quality products and services and you have reputed clients and a good infrastructure, then accounts receivable financing could be of great help to you. Asking for a bank loan to increase the line of credit could well be a futile effort as most banks are turning down loan requests. Even if you qualify for a loan, it could only be a temporary solution since you will be borrowing money and will need to pay it back along with interest. In this situation, you can utilize your accounts receivables as collateral to get the working capital you need, without incurring debt. Furthermore, your company’s weak cash to debt ratio, credit history and profit margins won’t create an obstacle for receiving such funding. You will be selling your invoices to a factoring firm that will pay you an advance amount (40% to 90%) based on the invoice’s face value and aging.
The methodology of factoring is based on selling your assets (invoices) to a factoring company, at a discount. This is neither a loan nor a line of credit, rather it is an asset sold with the convenience of receiving money in 4 days. You may choose to factor one invoice, which is called spot factoring or you can sell multiple invoices. This way of funding can bring a great solution to your ongoing funding woes and will make your company’s balance sheet look healthy.