If your business is struggling with cash flow issues, one of the effective ways to remedy the situation is to collect on your accounts receivables. Normally, this would mean getting your customers to pay their invoices for all goods your business has supplied or services you’ve rendered. Unfortunately, many businesses give their clients 30, 60, 90, or more days to pay, and even then, there’s no guarantee that your customers will pay by the deadline you’ve established. That doesn’t mean your unpaid invoices are useless, though.
There are two primary ways you can turn your B2B invoices into cash quickly: accounts receivable financing and factoring. While many people use these words interchangeably, each offers a slightly different solution to the same problem. They are both considered forms of financing, but there are distinct differences between how each works. Knowing these differences is key to deciding which is right for your business at any given time.
Accounts Receivable Financing is a Loan
Many companies, including banks, offer accounts receivable financing. The process of getting approved is similar to what you’d experience if you were trying to get approved for a business loan, but in this case, it’s an asset-based loan. The amount you qualify for is based on the value of an asset. While you could use your business, home, or equipment as collateral, you can also use your unpaid invoices as collateral. When you apply for an asset-based loan, the financier checks into your business and credit, examines your cash flow, and confirms that they feel confident you’ll collect on your invoices and will be able to pay back the money you’ve borrowed. If they give you a green light, you may be advanced a fair portion of the total amount owed to you. As your customers pay you, you pay down the money you’ve borrowed. Depending on whom you’re borrowing from, you can get cash in the form of accounts receivables financing within a matter of days. Although the terms offered will vary, most of these loans are set up as revolving credit, like a credit card, meaning you can withdraw money as you pay down balances, too.
Financing may be better if your business is established and has good credit.
Because financing is a form of lending, your business credit matters. However, if you do qualify for financing, you may find it’s one of the more affordable ways to get cash injections into your business.
Accounts Receivable Factoring is Selling Your Invoices
When you work with a factoring company, that company purchases your invoices from you and they handle collecting from your customers too. Because of this, it’s your customer’s credit-worthiness which matters most. If you work with a really great factoring company, they’ll do all the legwork, so you always know how much work can be performed or what amount of goods can be sold without edging into risky territory where customers might not pay their bills. Some factoring companies, like Interstate Capital, offer value-added services too, like discount programs and 24/7 access to your account. Depending on who handles your factoring, you can be funded within 24 hours of submitting an invoice.
Unlike a loan, there’s nothing to pay back with most factoring plans, though some are set up in a way that will charge back the invoices if your clients don’t pay. Even still, that’s fairly rare, simply because diligence is done before extending a line of credit to your customers. Moreover, you can become established with a factoring company and only factor invoices as needed. There’s no requirement to factor all of them or factor on any kind of a regular basis.
Factoring may be better if you don’t qualify for loans.
Because factoring companies are purchasing the debts, they’re more concerned with the end-customer’s ability to pay than anything else. That means factoring can get cash into your business fast, even if you’re running a small business that hasn’t established credit or even has credit problems. Moreover, factoring companies handle the invoicing process for you, so it can cut down on the amount of in-house work that needs to be done, a big help for solo-entrepreneurs and small business owners with time constraints.
Get Started with Invoice Factoring
Invoice factoring is a fast and easy way to improve business cash flow, plus it works well when other forms of lending don’t. At Interstate Capital, we’re here to support you as your company grows. We understand that small businesses and start-ups have different needs than larger companies that have been in business for a while. That’s why we focus on factoring and see to all the details, so your small business can grow. If invoice factoring sounds like the right solution for your needs, get an instant funding estimate form Interstate Capital.