What are cash advance loans?
Cash advance loans are a good option for short term financing needs. Unlike traditional loans for small business, a cash advance loan tends to be secured by your merchant account sales. There are some cash advances that will look at your average sales and base the loan on that. But those loans tend to be for more established businesses and not start up business.
Accounts Receivables Factoring
What if you do not accept credit card payment? There is another short term financing option similar to cash advance loans. This type of financing is called accounts receivables factoring. In this case, you can use your regular invoices (non-credit card transactions) for working capital.
Keep in mind that factoring is NOT a loan! Its a method of secured business financing that uses your accounts receivables not only as security but as the benchmark of the amount of financing they will advance.
There are many types of factoring companies. Some of them only work with certain industries, so you need to contact them and make sure they work with your industry. They will look over your list of accounts receivables and they will choose the invoices they are willing to factor.
What kind of invoices are good for factoring
Keep in mind that factoring companies are not in the business of buying bad debt. One of the reasons a lot of start up businesses like using factoring is because its not based on the business owners credit or the credit of the business. It is based on the strength of the CUSTOMERS. So if your customers have bad credit, then its not an invoice that will be accepted,
How Factoring Provides Working Capital For Your Business
Once your invoices have been approved, the factoring company will notify your customer that the collection of debts has been turned over to them. Many suppliers are familiar with this type of arrangement but if your customer doesn’t know what it is, the factoring company will send a detailed explanation on how account receivables factoring is done.
The amount you are advanced against these invoices tend to be between 70 -95% of the invoice value, again depending on the factoring company and the quality of your invoices. The factoring company will do all the collections of these debts. If everyone pays on time they will take their fee and return the balance to you.
So lets say they gave you an advance of 80% against your receivables. Everyone pays on time. They will collect all the money and take their fee. Lets say they charged 10%. They will then give you back the other 10%.
If not everyone pays, there are some fees that will be assessed . Again the amount depends on your factoring company. Some factors are non-recourse meaning that if they are unable to collect against the invoice they will not go after you to make good on the invoice. Some are full recourse meaning you will be responsible for paying them for the invoices that are not collectible.
Why is factoring considered a short term method of financing
Factoring is more expensive then obtaining a business loan. If you can qualify for a business loan then you should definitely go that route. But if you are a business that for some reason doesn’t qualify for a business loan, then factoring can be a quick and easy way for you to obtain the money you need to continue to grow your business.