One of the biggest misconceptions small business owners have about financing is that it’s just for purchases. It’s easy to distinguish between credit like credit lines and secured financing like equipment loans, but that’s only the tip of the iceberg when it comes to financial resources. There are also tools designed to give you short-term advances for quick working capital, as well as those designed to help you manage the day-to-day expenses that put demands on your cash flow. That’s where accounts receivable financing comes in. As a resource, it can be used to raise working capital when you need it, but its ideal application is to regulate incoming money and make your cash flow more predictable.
You might be wondering how it does that and why. Since factoring is an advance against the money you are owed, it’s the payment history and credit of your customers that need to be reviewed by the financing company, in addition to your own financial health and credit. The customer’s credit is the larger issue, and there are options based on when you expect payment to arrive and whether you are financing all your invoices or just a few. When you regularly finance all your outstanding invoices, you get the opportunity to predict incoming money, so you can also better schedule your outgoing payments.
For many companies, this cash advance is the key to building a cash flow model that helps improve their business credit score and relationships with vendors and customers alike. When you can count on a certain percentage of an invoice being paid on a certain date, you can better plan debt payments, increasing your record of on-time payments across various parts of your company’s regular overhead expenses. Accounts receivable financing is designed for this, and the relief it offers can make the difference if you are in debt because of taxes or other cash flow issues that have nothing to do with your company’s total income and everything to do with when you get it.
The important thing to remember is that this tool is not for every business. If your company operates on a cash and carry a model that involves a lot of credit card transactions or you have an alternative business model imposed by your industry as health care businesses do, then you will find there are other options designed with you in mind. For companies that rely on invoice billing, though, this powerful tool is designed to help maintain good credit and even out cash flow so you can fix troubled payment histories for debt payments, supplies, utilities, and rent, or even your company’s tax obligations. That’s how your company can use accounts receivable financing to get organized.