Many businesses offer payment terms and have to deal with the potential for negative consequences that may come with extending terms to customers. For business owners, payment terms can effectively feel like loans to the customer that lock up a business’ capital. If the balance of a company’s accounts receivable grows, so does the need for replacement cash flow to support the costs associated with normal operations. Some businesses turn to traditional commercial lending sources like bank loans to increase capital. However, commercial lending doesn’t work for every company and typically is not readily available for short-term use. Alternative business finance options like factoring, invoice discounting and asset-based lending often offer an untapped resource for which businesses can bolster cash flow.
How does it work?
If customers are dragging their feet paying their bill, businesses thought they only had two options: sell the debt to a bill collector or ignore the debt and cease business with the client until payment is made. Neither of these solutions is ideal and can lead to other issues or end up costing more money! Handling invoicing, collections calls, credit checks and other back-office accounting tasks can be very inefficient and seem overwhelming for small and medium-sized businesses. Successful small and medium-sized companies are often focused on their core-competencies of providing their products and services to their customers. Tasks like invoicing and collections take excessive time, may require new employees to handle the demand or, involve the need to develop multiple relationships with vendors to perform credit checks or sell bad debt. For companies in start-up mode, or for those that are more established and don’t want to make the significant investment in resources needed to handle these back-office tasks, managing receivables through alternative business finance products addresses these issues.
Factoring services and invoice discounting (ID) can advance up to 90% of the invoice value to your business while payment is pending. After payment is made, your business receives the remainder of the invoice balance, minus fees for the service. Unlike commercial lending, factoring and ID does not create a new bill or another liability to maintain. Factoring and ID give you access to the capital that already exists in your business but is locked up in the accounts receivable row of your balance sheet.
Instead of requiring deposits or not offering payment terms at all, businesses can take advantage of alternative business finance solutions such as factoring services and invoice discounting to ensure credit checks and receivable data is actively tracked. Traditional commercial lenders tend to treat your business like an algorithm, while alternative business finance is often offered by funding partners who strive to understand your business and the unique aspects of it. Partnering with an alternative business finance provider like Bibby Financial Services allows a personal relationship and a level of service you simply cannot receive with traditional lending.