At one point or another, most business owners find themselves in need of additional liquidity.
This need could be due to various situations including an uptick in business or an overall lack of operating funds. Either way, in times like these, it’s important to consider all financing options. While most companies would automatically think to apply for a bank loan, it’s beneficial to remember that there are other options out there, many of which can be a more suitable for a small to middle market company.
Receivable factoring is a form of commercial financing that can provide fast working capital. It uses Accounts Receivables as the basis for financing, providing those who use it a fast and predictable access to cash flow. Factoring helps business owners smooth out cash flow mismatches, enabling them to focus on their core business without being weighed down by continual short-term funding constraints.
Factoring can be a viable option but it’s important for every business owner to really understand the needs of their company before choosing the next step on the road to financing.
So, when should a business owner consider factoring?
Many business owners find themselves in a situation where they need access to immediate cash in order keep their company moving forward. In situations like these, bank loans are simply not an option. It takes too long for a traditional loan to be approved and has too many conditions. Borrowing from a credit card is fast but extremely expensive, and ties the business owner’s personal financials to the business credit card.
When the need is for quick and reliable access to liquidity, factoring is a great fit. By providing upfront and immediate cash, the business automatically gets access to capital, enabling the business owner to take care of payroll, inventory, and other immediate business expenses.
Overall, factoring is a great alternative financing option for small and middle-market businesses. Did you know AR Financing for small business is just not about money?
It provides predictable cash to push the brand to the next level—without having to deal with the disadvantages of a traditional loan.
In today’s economy, it’s harder than ever for small businesses to secure a bank loan, since a bank requires those applying for a loan to have a long and established history of good credit and profit. This can be a serious challange for small businesses and startup companies who are just starting out and are experiencing a sudden increase in business. With no prior experience, profit or strong credit history, the bank is likely to consider them an unsuitable candidate for a traditional loan.
On the off chance that a business is approved, bank loans still involve a lengthy and complicated process, which may be too much for a thriving small business to handle. In this case, accounts receivable financing may be a perfect fit. Because factoring is dependent on the creditworthiness of the businesses’ consumers, those with little to no credit but who have a solid customer base are still able to qualify.
Because factoring is dependent on the creditworthiness of the businesses’ customers, it’s important to have a solid understanding of their financial status before considering factoring. If your customers are large businesses, dependable and pay on time, factoring may be a great fit.
Factoring is a viable alternative for businesses with annual income under $100 million. If any of the three situations above sound familiar, it might just be the right fit for your company.