Having assets that can be used as collateral is one of the most important requirements to qualify for a business loan, or most conventional forms of business financing. And it makes sense, banks and lending institutions want to protect their position by ensuring that you have the wherewithal to pay them back. The problem with this – and it’s a big one – is that most small and growing companies have few assets. Also, their owners usually have most of their money invested in the business anyways, which represents their biggest asset. Ultimately, this becomes a Catch-22 that prevents them from moving forward.
However, many companies need financing because they have cash flow problems, rather than because they need to make purchases such as equipment to real estate. Although business loans and lines of credit can certainly benefit these companies, factoring their invoices usually provides an easier and more effective solution to their problems. This is because most companies run into cash flow problems because they offer their customers the option to pay invoices in up to 60 days, even though they can’t afford it. Factoring solves this problem very well.
Basically, a factor finances your open invoices that are due in up to 60 days. This gives your company the money it needs to pay important expenses such as payroll, rent, and supplies. It relieves the financial pressures of having to wait for your invoices to get paid. The transaction concludes once your customers pay their invoices, on their contractually agreed schedule. This is an important feature of working with a factor – your customers are not required to pay any sooner.
Factoring companies are well-suited to work with businesses whose only, or biggest, asset are the invoices from their customers. As a matter of fact, factors consider these to be the best asset that you can have, as long as your commercial customers have good credit ratings. Also, additional qualification requirements are fairly simple. Your company must be well run and your accounts receivable should be free and clear of any liens and encumbrances. Many small business owners – especially those with large credit worthy customers – can easily meet this criteria.
In many instances, accounts receivable financing can provide a better solution for cash flow problems than other products. This is because the line is designed to grow alongside your sales. The line will increase as your sales grow, so as long as your customers have good credit that your company meets all the financing requirements. This is one of the main reasons why invoice financing is an ideal solution for companies that have few or limited assets and can’t qualify for conventional business financing.