Using collateral for a loan is a common practice, but certain businesses do not deal with large enough property to use in this way. Certain service industry companies and online businesses may be operating with very little equipment and no brick-and-mortar location. If this describes your business, it doesn’t mean you can’t take out a loan. A special kind of financing called “factoring” lets you use your account receivable invoices as collateral instead of property. Here is a look at what factoring is and how it can help finance your business.
How Factoring Works
Factoring can be broken down into three simple steps. The first step is to provide your customers with the goods or services they have ordered. You will now have invoices for your customers to pay you back at some future date. If you need that money right away, that’s where accounts receivable loans come in.
Once you have taken out an accounts receivable loan, your second step is to send your customer invoices to your lender. You will receive a specific lump sum for these invoices, usually some percentage of their value. You now have the cash you need to spend on necessary expenses.
The last step is that your customers pay the invoice value to your lender. In this way, you have provided collateral without as much risk to you or your property. After taking out any agreed upon fees, your lender will pay you the reserve balance of the paid invoices.
Short Term Verses Long Term
The first benefit of factoring is that you do not have to wait for your customers to pay you to have usable cash. If you have bills to pay or have come across an investment opportunity, then using account receivable invoices as collateral means you get money that was coming to you anyway, but right when you need it.
Good Credit Verses Bad Credit
Another benefit of factoring is that you are not relying on your own credit but rather that of your customers. So long as you have a good history of invoices paid, then you may have good enough credit to get one or more accounts receivable loans. If your business has bad credit, ask your local lender if you qualify for an accounts receivable loan instead.
Lump Sum Verses Scalable
Factoring is a scalable kind of loan. When you do more business and your invoices are worth more, then you can get more upfront cash. This means you have a loan agreement that grows with you, instead of being a fixed lump sum. Similarly, if you have a more seasonal business, then you can decrease your financing during slow periods easily.
Using your account receivable invoices, you can get great value right when you need it. With just three easy steps, you can turn your invoices into fast cash that can be spent to pay other bills, increase advertising or can be funneled into research and development. The benefits to this process include quick turnaround for your goods and services, the ability to overlook bad credit and the opportunity to grow your financing with your business.