Using Receivables to Finance Your Small Business
The desirability of landing substantial orders from large government and commercial clients is undisputed. However, these customers invariably insist on credit terms of up to 60 days before payment. This can create cash flow problems that make it difficult for you to cover your ongoing expenses. Financing your small business through receivables financing, also known as receivables factoring, can help you resolve this dilemma.
The Benefits of Receivables Financing
Receivables factoring allows you to solve your cash flow difficulties and maintain small business growth while you are waiting for slow-paying customers to honor their invoices. It also allows you to offer payment terms to new clients that qualify for them. Although outside investors can strengthen your financial reserves, they often insist on a measure of equity in your business, whereas factoring companies that handle financing through receivables allow you to retain full ownership.
Qualifying for Receivables Financing
Approval for receivables financing generally comes much easier and quicker than for traditional loans because factoring companies are purchasing your invoices rather than lending you money. Sometimes small businesses have difficulty qualifying for loans, but companies that factor receivables look not at your credit rating but rather at the commercial creditworthiness of your clients. You can factor as many invoices as necessary as long as they are for delivered merchandise or finished work, they are free of liens, and your customers have good credit.
How Receivables Financing Works
With receivables factoring, after delivering your product or completing your work, you send your customers an invoice, and you also send a copy of it to the factoring company. The factoring company sends you an advance of approximately 85 percent of the invoice amount. After the customer pays according to the agreed schedule, the finance company sends you the remaining 15 percent minus the factoring fee.
Receivables factoring is an ideal financing method for small businesses that want to offer 30 to 60 day financing terms to clients. For more advice on small business financing, contact Smart Capital Lending Group at 407-202-8494.