Cash Flow Financing Keeps Businesses Afloat Through Various Funding Methods.
Factoring receivables is the practice of selling the interest in your receivables or invoices to a third-party, or "factor," at a discount. By factoring receivables a company can leverage the value of its receivables by collecting the funds from the factor well in advance of the payment by its customers. Factoring receivables allows a compCash Flow Financing
As any business owner knows, “cash is king!” This truism applies whether you are the payer or the payee. You either are anxious to receive and have cash in-hand from your customers or you are relieved to have cash available to pay your own bills. Whether cash is coming in or going out, there must be some sort of balance or a business will have difficulty meeting its financial obligations. That is why cash flow is such a critical issue for any business owner.
The problem is that most businesses must provide payment terms to their customers that can stretch out the payment turnaround for 30-90 days. This delay can be a killer for a business that is new or relatively new and is not cash flush. In these cases it is almost imperative that the business owner secure some type of cash flow financing.
In the broadest sense, cash flow financing is simply some method of obtaining a form of funding from a third party that allows a company to establish a financing bridge that keeps cash flowing while awaiting payment from clients. In the strictest definition, cash flow financing is essentially receivables factoring, a practice that provides advance payment to a company based on invoices issued. Of course, there are variations on the cash flow financing theme.
The most basic form of cash flow financing is a business loan. While this is likely to be the most affordable option, it is probably the most difficult to attain. A company must have fairly well-established credit and undergo a pretty rigorous application and approval process. This can take a while but once received, a company can then use this financing to compensate for cash flow deficiencies or fund capital projects.
Another type of cash flow financing is a line of credit. Like a business loan, this depends largely on the credit worthiness of the borrower. But, unlike a standard commercial loan, a line of credit qualifies the borrower for funding that is made available to a maximum pre-approved amount on an as needed basis. Qualifying for a line of credit has pretty strict credit standards and requires some type of collateral. Still, it is nice to know that cash is available should it be needed to assist with cash flow in special circumstances.
Accounts receivable funding from a bank is another type of cash flow financing. In this case, an advance from the bank in which they have their account is provided when an invoice is generated by the business. It is essentially a loan from the bank based on the invoice amount. The cost of this type of financing is more but qualifying is easier and cash is sometimes available the same day. A program offered by Chesapeake Bank is a very good example of this type of cash flow financing.
A very similar type of financing is invoice factoring or receivable factoring. In this scenario, a company or individual, called a “factor,” essentially purchases the invoices or receivables from a business at a discount. Typically, the factor advances 80-90% of the value of the invoice up front and provides the balance, less a fee for the service (usually 1-5%) once the invoice is paid. Again, the cost may be higher but the company is not “borrowing” any money. They are simply receiving expedited payment for money already owed to them. As banks have become more strict about lending during the recession, factoring has become a much more popular form of business financing.
There is no lack of cash flow financing options. It is strictly a matter of determining the type of financing that makes the most sense for a particular business to keep the cash flowing.
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