Various Forms of Cash Flow Financing Can Keep A Businesses Solvent When Cash Is Tight
Oliver Feakins is an administrator of Factoring Force at http://www.factoringforce.com, a resource and information center about invoice factoring and cash flow financing services.
If you own your own business you know one thing for certain: “cash is king!” This is a valid statement whether you owe it, or it is owed to you. Either you are waiting anxiously to be paid and have that cash available from your clients or you are grateful to have the cash in your account in order to pay your own bills. But as cash is received and cash is disbursed, there has to be a balanced flow or a business will find itself challenged to maintain financial equilibrium.
One complication is that most businesses offer payment terms to clients that can stretch the receivables timeline from 30-90 days. This dormant period can be very challenging for a business that is just starting or is relatively new and relies on these payments for cash to pay bills. It is situations like this that mandate that most small to medium sized business have access to some type of cash flow financing.
Defined broadly, cash flow financing is a process that allows a business to have access to cash when awaiting payments from customers. Typically, this cash is made available by a third-party. Defined strictly (which many companies do), cash flow financing is synonymous with accounts receivable factoring, a program that enables a company to expedite the receipt of funds for invoices already issued. As you might expect, there are a variety of alternatives available to a business seeking to secure cash flow financing.
The most common type of cash flow financing is a commercial business loan. But in today’s era of tight credit this type of financing may be the most difficult to attain, though it may be the most affordable option. A strong credit history is required and the application and approval procedures are lengthy and demanding.
One other form of cash flow financing to be considered is a line of credit. Similar to a commercial loan, qualifying will be contingent largely on the credit scores and history of the borrower. However, as opposed to a standard business loan, a line of credit enables the borrower to access funds that are available on an as-needed basis, the total amount of which has been pre-approved. Still, a line-of-credit normally comes from a bank, and banks are pretty cautious about lending right now. Consequently, in addition to strong credit requirements, some type of collateral must be presented. But it is comforting to know that funds are available should they be necessary to offset cash deficiencies in certain circumstances.
Financing accounts receivable through a bank is yet one more method of cash flow financing. In this funding scenario, a company will make arrangements with their bank to receive an advance payment on invoices issued. In reality, this is a loan from the bank which uses outstanding invoices as collateral. The expense associated with this type of financing is more but qualifying is less challenging and cash may be received on the same day the invoice is issued. A program developed by Chesapeake Bank is a very good reference for this method of cash flow financing.
A type of financing that is similar to financing accounts receivable is invoice factoring or receivables factoring. With this program, a company or individual, referred to as a “factor,” in essence buys outstanding invoices or receivables from a company at a discounted rate. Typically, the factor will provide 80-90% of the value of the invoice immediately and then present the rest of the face value of the invoice, less a fee for the service (typically 1% to 5%) once the bill has been paid. The expense may be higher but a business will not be borrowing any money. The company is simply receiving expedited payment for money that is due to them for products sold or services rendered. With the aforementioned tightening of credit by banks factoring is becoming a much more popular type of business financing.
There are many methods of obtaining cash flow financing. It simply requires that a company determine the type of financing that is most practical to keep cash flowing.
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