A quick cash-flow solution

When cash is short, consider invoice funding

Is this scenario familiar? Your customers are late in paying their invoices, making you short on cash, and the bankcashflow isn’t making any short-term loans. At the same time, your employees expect to be paid on time. What do you do?

You might consider a short-term option called accounts-receivable funding, suggests Chad Todd, regional vice president of AR Funding, Inc. ( “Accounts receivable funding is the oldest form of financing in the country,” he explains. “It accelerates cash flow.”

Accounts receivable (AR) funding (also called accounts receivable factoring) provides a line of credit against invoices, and that is what differentiates this source of finance from bank financing. “Traditional bank financing focuses on the business owner’s personal credit, the assets of the company, the kind of business the company is in, and the balance sheet in order to determine if it will lend money,” explains Todd. “Accounts receivable funding does not. Instead, it looks at your customers’ credit. The most important thing in this industry is who you are doing business with.”

What it boils down to is this: If you have good customers, you can get advances on the money they owe you.

How it works

Essentially, in AR funding, a business sells its invoices to the funding company. When a small business works with an AR financing company, it gets a portion of an invoice immediately upon origination. The business, at the same time, advises its customers to send payment to a post-office box. Although the invoice is made out to the business, it actually goes to the finance company. Once the invoice is paid, the business gets the remainder of the invoice amount from the finance company, less the finance fee.

“The value to our customers is that it they perform a service or sell goods today and invoice today, they can receive funding from us today. They don’t have to wait 30 to 45 days for the customer to pay them. In any business, you need money for payroll, rent, insurance, fuel, and other things. You need money; we eliminate the wait to get paid,” says Todd.

Pros and cons

As good as accounts receivable financing seems, there is one disadvantage: Cost. “Compared to traditional bank financing, this type of financing is more expensive,” admits Todd. “I always tell anyone interested in using accounts receivable financing to go to a bank first. If the bank can’t get you approved or will not provide you a line of credit, only then should we talk, because it is more expensive than a bank loan.”

On the plus side, however, is that this type of financing is available for startups. “We fund startups,” says Todd. “The most important thing to us is who you are doing business with. A startup will not have financial statements. But if it can give us a list of customers and how much are it will be invoicing them each month, it can get financing. We’ve gotten deals done with very little. We’ve done deals based on the articles of incorporation and an expected volume of dollars each month.”

Todd says that although AR funding is a very old type of financing, many small businesses have never heard of it. “We are admittedly a stepping stone for small businesses. And, we know we will only have our clients for perhaps up to 24 months, and then they will graduate to bank financing. We’re happy about that.”

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