If a company sells goods and services on credit, its balance sheet will show an incorrect balance. The books will show the money due, but the bank statements will be missing until the money actually arrives from the buyer. Most loan situations offer a 90 day same as cash option. This means you may not see your money for three months. Even if you have customers who pay on time, this delay between payments can create a big problem with your cash flow. Accounts receivable financing can help you get through dry periods between payments.
How will a receivables loan work?
There are two ways you can solve the problem when it comes to cash flow problems caused by delayed payments. The first method is a receivable loan. It’s basically a revolving line of credit, similar to a credit card. As extended line of credit, you can borrow against it if you need it. The money can be used to pay for inventory, payroll, or simply to run the business. When your cash flow picks up, you can start paying back what you borrowed.
What is factoring?
Factoring involves selling your accounts receivable to a third party. Bills are treated the same as any other form of collateral. The third party owns the accounts and pays you a percentage of their value. Once the factor has received full payment for their invoices, they will credit you the percentage they paid as well as any fees they may have charged for the factoring service. After receiving the money owed to them, they will return any remaining funds to you.
Factoring vs. Accounts Receivable Financing
The decision to choose factoring versus accounts receivable financing will be based on your business and its immediate needs. Factoring is more expensive than accounts receivable financing. If you have an established business with years of good credit and a good cash flow history, accounts receivable financing will cost you less in the long run. Factoring is often the best choice for young companies that are still building their financial reputation.
With a little care, your business can show a healthy growth spurt. This means that while you are selling a lot more on credit, it can put a financial strain on you if there are any late payments. While you don’t want to borrow money outside of your own business, you may need to if you don’t get paid back quickly enough. Understanding the financial health of your business will help you make the right choices. Being proactive when it comes to working capital, you want to apply for it before you actually need it. You need to research the different types of financing to know what you qualify for. Choosing the right type of working capital financing will allow you to manage your business and keep moving forward if there is ever a slowdown.