When you are just starting your business and have no credit history or payment history, it can be almost impossible to get a traditional loan from a bank.
Because the company has no credit record, the bank will use the owner’s credit history and credit score to determine if they are willing to loan the business any money.
So unless the owner has no debt and great credit, the company won’t get the loan. The part that makes this so odd is that if the owner has no debt and great credit then he or she would simply get a personal loan to then loan to the company.
So as with personal finances, you can’t get a business loan unless you have money and then you don’t need a loan.
But thanks to alternative financial lending services, there is another option for a business which has no tangible assets or merchandise to use as collateral. This solution is called cash flow based financing, revenue financing or accounts receivable financing.
And basically they all mean the same thing, you are getting money based on the value of the invoices that you have out to customers and are awaiting payment on. And the funds that you are getting can be used for paying employees, purchasing materials or equipment, growing the company or any other expense that you choose.
If you are considering this type of financing for your business, there are a few important facts that you will want to understand and consider before you implement a plan for financing cash flow.
Consider More than the Financing Costs
Many times a small business owner will shy away from anything that is going to cost the company money. But there is some truth to the old adage that you have to spend money to make money.
It is true that you will have to pay for the privilege of getting paid more quickly on your outstanding invoices, but look at all of the benefits of having fast access to that money.
Not only will you have the peace of mind of knowing that you have the operating capital that you need, but you will have the ability to make quick decisions and be very agile to adapt to the needs of your industry. Nothing is worse for a small business owner than having to turn away work simply because you do not that the resources to meet the increased demand. Not only are you giving up the current opportunity but this event could also influence your future if a client is not confident in your ability to meet his current or growing needs.
Turning away work can also be viewed as poor planning on the part of the owner or management team as they were not prepared to meet the market growth. So when thinking about the cost of financing cash flow, temper the downside of the initial cost with the potential for growth and the return on your investment (ROI).
Know Your Industry and Your Options
Some businesses are very cyclic and will never provide a constant cash flow throughout the year. Know this might make it easier for you to justify AR financing. A new business with only a small cash reserve could find it very difficult to survive the first slow season or dip in sales.
But knowing that sales will increase if you can bridge this time period, will make is easier to opt for financing. After a year or two in the industry, you will have had the opportunity to build up cash reserves to pay for expenses during the slower times. But that would not have been possible without you knowledge and confidence in assuming financing in the early years of the company.
Also consider other sources for financing as the company grows and begins to establish a credit and payment history. Many owners find that a line of credit is a good safety net for unexpected expenses.
Not a True Loan
It is also important to understand that financing cash flow with AR financing or factoring is not like a traditional loan from a bank. You are getting money right away for the invoices that you have sent to your customers.
The lender is getting the money paid to them by your customers so you do not have to submit payments to the lender. Of course, there are fees involved, so you are not getting the full amount that you invoiced your customer. That is how the lender is making money. In addition, the terms of most AR financing plans are fairly simple.
The lender gives you a set percentage of each outstanding invoice. The benefit of this is that there is not a huge amount of paperwork or applications to process to begin the relationship and the turnaround time is very rapid. In addition, you have the ability to choose which invoices and the number of invoices you would like to enter into the financing process, giving you the ability to control the fees that you incur.
If a certain client is known to pay quickly, then you don’t need to pay the fee to expedite that invoice which is a great benefit for you. Likewise, if a client is late paying an invoice, it is not your responsibility to contact then to make other payment arrangements. Again, that benefits you and takes away one more difficult process for you to manage.
The Final Words on Financing Cash Flow
For many new or small business owners, financing against outstanding accounts receivable is a great way to ensure cash flow and grow your business.
It offers flexibility and security without forcing you to relinquish a portion of the company ownership to an outside party or to allow a lender to manage or influence your business operations.
Have this type of relationship in place as a standing agreement allows for nimble business adjustments to adapt and take full advantage of opportunities for growth and expansion and thus provides a superior return on investment.
But do take the necessary time to completely read the document outlining the terms of the agreement prior to signing it, like when a person gets a title loan without job. Used correctly, financing cash flow can be a great tool to ensure your businesses success.
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