Last Updated on September 13, 2021
There’s nothing more worth celebrating for a business than getting a major new customer or a big new order. It’s an exciting time for everyone in the business as it ramps up production, adds staff, and buys inventory in anticipation of new revenue. However, if it’s a typical business that operates from invoice to invoice, that excitement can turn to dread as it waits for the new customer to pay its invoice. It’s like running on a treadmill trying to get their cash flow to catch up with their invoices, making it difficult to achieve sustainable growth.
However, when businesses understand the power of factoring receivables, there is nothing to dread.
Like Dorothy’s ruby red slippers, businesses have always had the power to get where they need – with the receivables themselves. That’s because, in the world of accounts receivable financing, your invoices are as good as cash on hand. The moment an invoice is generated, it can be exchanged almost immediately with a factoring company for up to 90% of its value in cash. They receive the balance, less factoring fees of 1% to 5%, when the customer pays the invoice. With an established factoring account, the process of factoring receivables can be repeated as often as needed.
When Factoring Receivables Makes Sense
As with any form of financing, factoring receivables may not make sense for every business. However, if you are a B2B business with financially stable customers, it may make sense for the following reasons:
1) Faster and easier than traditional bank lending.
It’s called a cash flow crunch because it’s happening right now. Traditional banking may be preferable for well-established businesses with a solid credit history and strong cash flow. However, even if you could qualify for a traditional loan or line of credit, the application and approval process can take weeks, sometimes months, with no guarantee of receiving favorable terms.
A factoring receivables account can be set up with funds approved and delivered within a day or two. With an established account, you can submit an invoice and have cash on hand within hours. While traditional financing may be less expensive in the long run, you can control your factoring costs by submitting invoices only when needed, costing you less in the short-run.
2) Cash on hand today can be worth more now than when it’s received in 30 to 90 days.
The only thing worse than not being able to pay the bills today is the cost of lost opportunities. Businesses need to cover their operating costs while ramping up for a new customer. But they also need to have capital available to be able to jump on new opportunities. Businesses stuck in a perpetual cash crunch cycle have difficulty doing either. Having the cash today to take on a new order or a new customer can be worth far more than the 1% to 5% in fees.
3) You can still treat your customers well.
Good customers expect some level of preferential treatment that includes favorable payment terms. When you work with a factoring company, it acts on your behalf to collect the payment according to the original terms of the invoice.
4) Your credit is not negatively impacted because it’s not a loan.
Receivables factoring does not involve loan financing. It is a sale transaction involving the exchange of an invoice with cash. The only credit check involved is with the business’s customers because the factoring company needs the assurance the invoice will be paid.
5) Factoring receivables with a bank.
While factoring receivables is a straightforward process, the cost and quality of services can vary widely among factoring companies. In many cases, the factoring company operates as a middleman between the funding source and the business, which can add costs and slow down the process. Factoring companies, such as altLINE, that are bank factoring services, operate in a highly regulated industry and have direct access to funds, which lowers the cost and accelerates the process.
For growing businesses, cash is their lifeline and having to wait to receive payment for work already performed can make it difficult to get to the next level. That’s when having a ready source of capital makes sense and, for many businesses, factoring receivables can be the easiest, fastest and most flexible way to access capital. We invite you to contact us to learn how our 80 years of experience can make your cash flow concerns go away.
Jim is the General Manager of altLINE by The Southern Bank. altLINE partners with lenders nationwide to provide invoice factoring and accounts receivable financing to their small and medium-sized business customers. altLINE is a direct bank lender and a division of The Southern Bank Company, a community bank originally founded in 1936.