Even if you don’t have regular cash flow problems, most businesses eventually experience some type of pressure on their cash flow. It may be a downturn in the economy, a quickly growing payroll, a slowing of your industry sector, a seasonal sales issue, or even an unexpected tax liability.
No matter the cause, when time is of the essence you normally have two choices: A bank loan (or “line of credit”), or a bank loan alternative like accounts receivable factoring.
Bank Lines of Credit
Let’s focus on bank loans of credit first, as they can be a means for quick cash flow if they are already set up. Here’s how they work: The bank approves you for a certain amount, or line of credit, but you don’t draw on that line or amount unless you need it. So, if you have a $100,000 line of credit and you need $50,000 for cash flow one month, you can draw on the $50,000 and be charged interest on that amount until it is fully paid back. Sometimes, but not always, the bank charges you annual maintenance fees or a fee based on the entire line of credit even if you don’t use it all.
A line of credit does have some strong points. First, you can get the money you need quickly, assuming you set a line of credit up beforehand. Typically, the interest rates and fees are reasonable if you have been in business for a long time and have a strong credit history.
As with any loan from the bank, the banks can require burdensome paperwork and invasive business and personal financial disclosures to obtain credit lines. Many business owners do not want to deal with this hassle. Plus, an approval can be hard to come by, especially if the economy is struggling, or your credit history is not perfect. You may even be approved for some credit but often it is not the amount a business owner really needs to successfully run their business.
In addition, the banks can change their terms. The interest rates may go up, the fees may increase, or the line of credit can even be terminated at the bank’s discretion. If you carry a balance, just like with a credit card, the interest charges can add up over time. Not to mention, the sustained debt load can weigh on your future cash flow and your current credit standing.
A Better Alternative: Accounts Receivable Factoring
Invoice factoring is similar to a bank line of credit in one respect; you can access cash fast, but unlike a bank line you do not have to go through an overly cumbersome approval process - waiting weeks or months without hearing back at all as to whether or not you may be obtaining this much nedded capital. Factoring companies are getting than ever and are providing the needed capital sometimes in as little as 3-7 days. Although there is an applications for this type of financing, many factoring companies have made it very easy, and don't scrutinize your business credit. The factor bases their financial arrangement primarily on your outstanding invoices and the creditworthiness of your clients.
You normally receive about 80% to 95% of the face value of your invoices upfront, and then receive the remainder, (less the factor’s charges), once the payments are collected. You, or rather your invoices, determine the amount of cash you receive, not the bank. So if you need $100,000, you can factor enough invoices to get that cash. If you only need $20,000 you can factor a smaller amount of invoices. In addition, you don’t have to collect on the invoices, the factoring company takes over the responsibility. Also, you do not carry debt every month. You can choose to factor more invoices but you do not have an ongoing loan balance like you do with a bank line. Therefore, your credit report looks better.
A Quick Summary
So let me answer the original question with a quick summary. Accounts receivable factoring provides you the same quick cash flow, but you don’t have to go through the hassle of an intrusive approval process, worry about the economy or lending environment, wait weeks of months to hear whether you can obtain the much needed capital, deal with unexpected rate or fee changes, keep debt on your books month after month, or worry about having the source of extra cash flow terminated.
Contact us today to learn more about how invoice factoring may be a good fit for your business.