Every business requires a sufficient, unencumbered cash flow in order to function in the real world. Gradually, as a business expands, it develops the necessity to expedite its cash flow. When this occurs in the context of a small business, the first instinct is to seek financing from a bank. Sometimes, however, a business may not meet the stringent requirements imposed by such lenders. In other cases, a lender may not fully attend to a company’s financial needs. Of course, there are a number of alternatives that one may consider. These alternatives include accounts receivable factoring, which is critical to supplementing capital.
This accounts receivable financing option refers to the financing a business obtains by allowing banks to purchase its accounts. The amount is closely correlated to the invoice volume. There are many pros and cons to using this financing method, as opposed to choosing other financial options. To learn why a business might consider financing, continue reading.
Benefits of This Financing Alternative
One of the many benefits of using this financing option is that it increases business capital and financial potential. Theoretically speaking, if a small business had fairly large quantities of accounts receivable and sold them to a large corporation, they would obtain a considerable financial return. The stronger a consumer’s credit is, the larger the factoring will be. When banks make certain considerations, such as the amount of money to loan a business, they consider credit strength as a solid foundation for their loans. Sometimes, it is preferable to seek aid from a specialised company than a bank because these companies can expedite the process of financing your monetary needs.
Generally speaking, this financial option helps you obtain the desired funding more efficiently. Typically, the process of approving, setting up and funding accounts receivable requires only a few weeks. Usually, when a bank partakes in this process, they request more time to conduct an in-depth credit review of a business. Therefore, it is always preferable to choose a company that specialises in this, rather than a bank that requires a timely, drawn out process.
When you choose this financial alternative, you automatically have the potential to expand your financing potential over time. Some companies increase your financing options gradually, as your business grows. Therefore, you will never receive a credit line larger than you can afford.
Another advantage of receiving this type of financing is that it does not impose the same disadvantages and limitations as a loan, because it is not a loan. Essentially, when you work with a company that specialises in this, they purchase your accounts receivable accounts using cash. As a result, you do not increase your company’s liability. Instead, you end up increasing your capital. This is a great financing alternative that enables you to avoid debt.
Did you know that this financing alternative is far more cost-effective than competing options? Furthermore, it is far less expensive than equity, as well. Therefore, if you have a company, and you would like to increase your cash flow, without causing your liability to soar, then factoring is a unique and suitable option for you.