Asset based lending, in particular, accounts receivables and/or purchase order funding, is can be a more attractive financing options than more traditional lending methods. A traditional banking facility of $50k that is fully deployed is not a benefit to a growing business, rather a hindrance.
With an accounts receivable line a company can better sustain growth, because the receivables line will grow with the sales of the business and effectively increasing the cash flow to meet payroll, make payments to suppliers and cover operating expenses, the business can focus on generating new customers and increase profits. The end result being a business that is more attractive to a bank, thereby, achieving the desired result. A traditional banking facility large enough to handle the financing needs of the business.
However, this is becoming a more “accepted” and useful method to inject cash flow for a business. Many small to medium sized businesses that have survived this economic downturn, are finding access to cash and traditional banking lines of credit are not enough to support growth. A traditional facility is capped or has a hard limit, whereas a receivables/factoring facility can grow in parallel to the sales of the company, provided the credit of the debtors support the sales.
Qualifying for an accounts receivables line is based on the credit worthiness of the customer base and strength of the invoice trail. Because this is not characterized as a loan there is no debt shown on the balance sheet. This is a purchase of an asset or invoice at a discount and costs are calculated on the turn of the receivable.
The costs to a business can also be quantified by lost revenue and lost opportunities. How much do businesses lose each year to bad debt and write offs as well as lost sales or turning away of customer orders because of the operating capital the business has tied up in open receivables.
Many businesses utilizing a factor have decreased offsets and bad debt thanks to the attention paid to the debtors credit rating. Businesses are able to accelerate their cash flow, in turn, accelerating and increasing the number of orders/jobs fulfilled, directly increasing their bottom line and adding revenue to business. A banking line is not as quick or flexible enough to increase with the rapid growth a business may see. What is the cost to a business in missed opportunities.
Businesses today need access to cash when they receive the orders not when they have reaped the profits or have become profitable. Businesses today can become profitable with access to cash and financing. In transactions with 20% margins, what is more costly the 3-4% “cost” of financing or the loss of the 16% profit. Many businesses today are turning down opportunities, bids, purchase orders, new business because of the lack of available cash flow.
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