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Temporary finance for your business
Posted in: Blog, Funding by Brian Cauble on May 15, 2009
Imagine for a second that your business is experiencing a shortage in cash flow. You sitting at your desk late at night looking at the screen wondering how you make payroll. The funny thing is that accounting shows that you are profitable. You have made money. The problem is that your money is tied up by people who owe you money (accounts receivable). If you could only get those people to pay your invoices, you would be fine. So how do you do it? You can’t.
However, you can get the money that is owed to you through a method called Factoring. Factoring means that you are selling your invoices at a discount. Factors will buy (most of) these invoices and they will collect it. The upside is that you get your cash immediately, and you can make payroll. Another upside is that you don’t have to collect the money. The factor now owns these invoices. The downside is factoring can be an expensive form of financing. However, some times it can be a good form of temporary financing in your business.
If you have relatively good credit, you should consider borrowing against your assets instead of Factoring. You can borrow against your A/R, Real Estate, Inventory, Purchase Orders and anything else of value that can be liquidated. This is called Asset Based Lending and it works much more like a home equity loan for business. Except your collateral is not your house. It is your assets. Just like any loan, you pay a rate (normally lower) on only what cash you borrow and you pay it back in the future.
These are both good alternative methods of getting cash when you are generally a strong company but in need of temporary cash. Just use them sparingly and make sure that you shop around for the best rate. The are thousands of Factors and practically all banks will lend you on your assets. Good luck!
