Article: Need a Business Loan? Consider Invoice Financing
It is very common in business to provide commercial and government clients with up to 60 days to pay their invoices. At the same time, many of the cash flow problems that afflict companies can be traced to the fact that they offer 60 day payment terms to their clients. And, it understandable. The business must cover all expenses – rent, suppliers, and salaries – while waiting to be paid. And since few companies have substantial bank reserves, it only takes a few unexpected large orders to tilt the cash flow balance to the other side and start having problems.
Most business managers have two standard approaches to this problem. The first approach is to try and negotiate quicker payments from clients. Unfortunately, this seldom works and clients almost always have the upper hand. The second approach is to go to the bank for business financing. Your success in obtaining bank financing will depend in your company’s balance sheet and track record. Generally speaking, to qualify for a business loan you will need a rock solid balance sheet and a track record showing consecutive years of profit. However, business loans may not be the best solution for this type of problem since many times business expenses are variable and tied to sales.
The best solution to the problem is to get paid for your invoices quickly. Now, what if your customers agreed to pay 80% of the invoice on the spot, and then pay the remaining 20% after 60 days? Would most, if not all, of your cash flow problems disappear? Most likely. This can be achieved, and without changing your customers’ payment habits. The solution is to finance your receivables
Receivables financing provides you with an advance on your invoices. This helps you put your company on a more stable financial footing, enabling you to pay salaries, rent and supplier expenses. Generally, the funding company advances about 80% immediately, on your invoices for delivered products or services. The remaining 20%, less a small fee, is advanced once the invoice is actually paid by the client.
Invoice financing, as accounts receivable factoring is also called, has a number of benefits over conventional small business loans. First, is easy to obtain and can be set up quickly. Second, and more importantly, your invoice financing line is tied to your sales. This makes it an ideal solution to address your changing needs as the line grows in parallel to your business. Your financing grows, as your sales and your company grows.
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