Given today's economy, most small business owners are looking for new and innovative ways to improve their cash flow. In the old days, they typically thought about going to a bank first, however, unfortunately the reality is that with today's tight credit market, this approach is not very successful.
It is very hard for a new small business to even get a loan. You may have heard that Bank of America recently extended more than $12 billion in credit to small businesses, and they consider a small business to be one with revenues up to $20 million. But the reality is that many small businesses do not qualify.
However invoice factoring, also known as accounts receivable funding, is rarely thought of when someone needs cash flow or working capital for their business. Why? Because most business owners are programmed to seek financial solutions from their business bank.
Accounts receivable factoring is not a typical "bank product" so this alternative is confusing for most business owners. A business owner seeking working capital usually looks for a specific amount of money - otherwise known as a line of credit or credit limit. Traditional funding strategies dictate limits on funds available based on the pledged collateral assets.
Furthermore, small business loans do offer an advantage because it is basically a lump sum for immediate investment and business loans help bridge financial gaps. IF you can get one, great. But that is challenging these days. Therefore small business factoring helps provide a steady and reliable cash flow. By selling your invoices, or factoring the invoices in return for an advance of funds, it will cost up to a percentage of the invoice value.
Advantages of factoring over standard small business loans or overdrafts include the following points: You get easy access to funds. Business loans take time before the funds or overdrafts appear in your bank account. A factoring company provides funds within 24 hours of invoices being issued. If you take out a small business loan you are only allowed to borrow a fixed amount, and once you reach that limit, youŽll then need to renegotiate with your lender.
Small businesses who borrow against invoices through factoring know that is a more flexible approach because as their sales grow, their business grows. Borrowing against your invoices through factoring offers a flexible approach, and in turn, you can focus on generating more sales rather than chasing payments.
Once you have engaged an invoice factoring company keep in mind all of the advantages it offers over business loans, overdrafts or other finance options such as: For every invoice issued, the factor company will take a percentage of its value. If you do choose to outsource credit management, there may be an additional fee. It's still important to take out credit protection - although the factor company will fund your invoices, you will still be liable for bad debts should the payees not settle.
Borrowing the funds to finance your business through its various growth stages as well as the economic forces can be achieved in a number of ways, but invoice factoring is becoming more popular, because it is an easy way to quickly measure the return on investment (ROI). And there are no loans to pay back.
This article was added on Wednesday 27 January, 2010.
