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Accounts Receivable Financing – How to Use Other People’s Money to Finance your Growth
Many people grew up reading Superman comics for entertainment. Ask yourself, would it be amazing if your B2B business was “faster than a speeding bullet, more powerful than a locomotive, and capable of leaping tall buildings at the same time (think of it as a metaphor)?” Would your business benefit if you could always keep cash from your invoices when you need them? Would your business benefit from virtually unlimited cash available for growth? Would your business benefit if you could “leap over” your cash flow problems to provide more products or services to your customers?
In general, the older your customers are, the slower they will pay your invoices. It’s like the old joke, the question: “Where does the gorilla fit?” Answer: “Anywhere.” For example, a small sound engineering company was engaged to provide sound effects for a large motion picture production studio. When asked to comment on his experience working with such a prestigious client, the owner said: “Ears scare”.
It’s a universal trend that your biggest customers may be the least likely to pay you. Do you have to wait 60 to 90 days for payment from your largest commercial or government customers? If so, accounts receivable financing may be the answer to your cash flow problems.
Accounts receivable financing has several advantages over regular bank financing. Your current credit score or your company’s credit is not an issue because the financing institution relies on your customer’s creditworthiness. In fact, some companies that are in the bank’s “special assets” department (that are being asked to leave the bank) are prime candidates for accounts receivable financing. At the other extreme, some companies that are in Chapter 11. Bankruptcy proceedings, (called debtor’s possession) can obtain financing of accounts receivable with the express permission of the bankruptcy court.
As your company grows, your accounts receivable financing will increase according to your credit limit. So if you’re with the right commercial finance company, your growth is potentially unlimited. Compare this with regular bank financing that looks at your current situation and your past two years of operating history.
Many entrepreneurs are optimistic, enthusiastic and very positive in their outlook for the future. Bank analysts are trained to anticipate worst-case scenarios. Every bank has to undergo periodical “Safety and Soundness Examination”. Part of this process is a team of federal regulators who evaluate every loan decision a bank approves.
There is a lot of truth in the old adage that a bank will only give money to people who don’t need it. Banks don’t want to suffer fines imposed by federal regulators if they are found to have made “bad” loans. Banks and commercial finance companies therefore have very different standards and approaches.
Accounts receivable financing can provide you with the cash you need within a day or two of your customer’s invoice. Some commercial finance companies have very sophisticated internet based submission systems. You submit invoices electronically; It is reviewed and verified; And the cash advance agreement will be wired to you on the same day. Other companies use paper fax based systems but the results are very similar.
Accounts receivable financing terminology can be confusing. The following terms have essentially the same meaning: accounts receivable financing, factoring, receivable factoring, component currency, discount factoring, asset-based lending (usually associated with very large transactions).
Bottom line: If your customers are paying you too slowly and this is limiting your business growth potential or profitability, you should consider accounts receivable financing.
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