You run a transportation company and just secured a new contract with a major automotive parts store. This deal will increase revenue by 30%. However, the terms of the contract include 30-day invoicing. You will need to hire at least one new driver but will not have the working capital until the company starts receiving payments from the automotive store. Somehow, you will need to cover payroll until your company is paid.
The success of any business depends on cash flow. Each dollar that flows to and from your accounts must be carefully monitored. This is especially true when it comes to invoicing. There are many industries such as medical offices, manufacturing, and construction that are not paid at the time of service or when an order is placed. In other words, there is a gap of time wherein a business waits for its funds. For example:
- Medical clinics wait for reimbursement from health insurance companies for services provided.
- Manufacturing often has accounts receivable related to products. For example, a furniture company may ship products to a retailer and receive payment once the goods are delivered.
- Construction companies and contractors may wait an average of three months before receiving payment from their invoicing.
- Staffing needs to meet payroll demands for large number of temp workers. They wait for companies to reimburse them for the workforce provided.
In cases like the above scenario, waiting for invoices to be paid can be crippling. Making payroll for example, is a significant responsibility. You need to ensure employees are paid on time which can be difficult if your company has outstanding invoices. This is where payroll financing helps. Use your invoices as assets in cases where there are gaps in receivables. Qualifying is generally easier than loan options.
Benefits
- Excellent option for new or small businesses
- Businesses without established credit or poor credit tend to have greater success with accounts receivable financing because pending invoices act as collateral. Generally, lenders do not factor in credit score or history
- Businesses have the option of accessing the full amount of unpaid invoices or just a percentage of the value. This flexibility is helpful, especially for those who want to minimize interest or avoid over-borrowing
- Instead of using credit for lending decisions, the quality of the invoices acts as a major factor
- The application process is generally simple and does not require borrowers to continuously reapply
- Borrows can satisfy short term cash flow problems and meet seasonal supply and staffing demands
While accounts receivable financing is not considered a traditional business loan, there are still associated risks. If an individual or business does not pay their invoice(s), the financed amount is still owed to the lender.
Costs
- Interest rates are based on the length of time amounts are outstanding, meaning clients who take longer to pay will cost the company more in the long run
- Businesses must have a collection process established in the event clients do not make payment on time or not at all
- Due to short loan terms interest rates offered can be weekly, 10 days or monthly and could be as low as 1.5%. It depends on the specifics of the case. For example, factoring a $10,000 invoice could cost the borrower $150 for 30 days and $300 for 60 days
Lending4Biz allows companies of access up to 95% of their outstanding accounts receivable with average rates range around 1.25% to 1.5% for the 1st 30 days. Visit our Working Capital / Invoice Financing page to learn more and apply.
