Businesses of any size can generate operating capital in one of two ways. The first way is to borrow money from a bank in the form of a loan. The second is to be paid by customers for products or services. However, unless the business chooses to sell accounts receivable, there can be a gap between providing the goods or services and the payment.
The Bank Loan
For most businesses, a bank loan is not an effective option for short-term or immediate operating capital. First, it is a lengthy application process which may take one or more months to be approved for funding. Second, bank loans typically have extended financial obligations in the form of interest and even, in some cases, early repayment fees and other costs.
Another important consideration with a bank loan or a line of credit through a financial institute is the impact it will have on your business debt record. This can be a significant concern, especially for startups and small businesses seeking investors or considering expansion.
Selling Accounts Receivables
When you sell accounts receivable to a factor, virtually the opposite happens compared to what you can expect with a bank loan. In is essential to be clear when you sell accounts receivable you are not getting a loan, nor are you adding any debt to your business.
Instead, what you are doing is getting cash up front for actual closed sales with pending payment by the customer. This funding will come to you within a few days of the application, providing the cash flow your business needs.
In addition, the advantages when you sell accounts receivable include:
1. No application fee and no deposit for the due diligence work the factor will complete for each customer
2. No personal guarantees required, eliminating your risk. In lieu of a personal guarantee, most factors will require a validity statement prior to approval.
3. No long-term bond or tie with a financial institute which can result in significant interest payments and fees.
4. Access to the information you need about your account through a secure, online site which is available 24/7 every day of the year.
5. Full professional back office support to include collection efforts and invoice follow-up when required.
Choosing to sell accounts receivable for factoring instead of applying for a bank loan is certainly an important option to consider. It is practical for both small and large businesses and offers several definite and immediate advantages over bank loans and lines of credit.
For more information on how to sell accounts receivable to address short-term cash flow needs see us online at website domain. At United Capital, we are here to help businesses of all sizes with the funding they need through factoring.
