If a company sells goods and services on credit, its books will show a misleading balance. The books will show money that should be there, but your bank statements will be lacking until the money actually arrives from the buyer. In most credit situations, a “90 days same as cash” option is offered. This means you may not see your money for up to three months. Even when you have clients that pay on time, that delay between payments can pose quite a problem with your cash flow. Receivable financing can help you make it through the dry periods between payments.
How Will a Receivables Loan Work?
There are two ways you can solve a problem when it comes to cash flow problems caused by delays in receiving your payments. The first way is a receivables loan. This is basically a revolving line of credit, similar to that of a credit card. As an extended line of credit, you can borrow against it whenever you need to. The money can be used to pay for inventory, payroll or simply to run the business. When the cash flow speeds back up, you can begin to pay back what you have borrowed.
What Is Factoring?
Factoring involves selling your receivable accounts to a third party. The accounts are treated just like any other form of collateral. The third party holds the accounts and pays you a percentage of their value. Once the factor has received payment in full for the accounts they hold, they will deposit the percentage they paid to you as well as any fees they may have charged for the factoring service. After the money owed to them has been received, they will then return any funds that remain back to you.
Receivable Financing vs Financing
The decision to choose factoring vs accounts receivable financing will be based on your business and its immediate needs. Factoring is more expensive than receivables financing. If you have an established business with years of good credit and a solid cash flow history, accounts receivable financing will cost you less in the long run. Factoring is often a better choice for younger businesses that are still building their financial reputation.
With a little nurturing, your business may show a healthy growth spurt. This means that while you are selling a lot more on credit, it can strap you financially if there are any delays in payments. For as much as you don’t want to borrow money outside of your own business, you may need to if you aren’t being paid back quick enough. Understanding the financial health of your business will help you make the right choice. Being proactive when it comes to working capital, you want to apply for it before you actually need it. You need to look into different types of funding to know what you are eligible for. Choosing the right type of working capital funding will allow you to manage your business and keep things moving forward if a slowdown ever occurs.