Ravi Chandran
Receivables financing is one way for a company to grow without using loans and accumulating new debt
Many business owners would much rather build their companies without debt and would prefer not to take out a loan. While debt can be very beneficial because it provides businesses with the capital they need to grow and stay afloat, it has two very big strikes against it; it has to be paid back and it’s risky. When a company develops too much debt, it takes very little for its financial standing to be ruined. Most owners would prefer not to go this route if at all possible. Others will find that it’s difficult to get a loan. They may have bad credit or simply haven’t been around long enough to qualify for a business loan.
Receivables financing is one way for a company to grow without using loans and accumulating new debt.
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Invoice factoring, purchase order funding, and receivables financing allow a company to leverage business they have already earned for upfront capital. The process is actually pretty straightforward. To begin, a business will contact a factoring company about selling their receivables accounts. This firm will then determine whether or not it is a good risk.
If they decide that it is, they will purchase those receivables at a discounted price. This is often between 80-90%. A company is a good candidate for factoring if the people or businesses that owe them money have excellent credit. This is crucial for any potential factor because they will be advancing the money to a company and will want to make sure they will be able to get it back.
Perhaps the biggest benefit that a business gets from selling their receivables is receiving money from jobs they have already completed far sooner than they normally would. The available working capital gives them the money they need to grow and maintain their business. In fact, for some companies, this is the only way they can stay in business. The factor will then collect on the invoices from the people that owe them. After the factor collects the invoices, they give the money back to the company that originally sold them the receivables, minus a predetermined fee.
The process for receivables financing is very easy, and it allows businesses to build and expand without assuming a loan or new debt. They can then use their current accounts with outstanding balances to get the money they need, advanced to them. It is important to note that the company selling their receivables has creditworthy customers. If not, they will have a difficult time finding a factor that will work with them.
Even if you are going for receivables financing, always be mindful that the time when you need money the most is when it’s hardest to get business loans – especially during the startup phase.
You simply won’t get a new business loan by walking into a bank with an idea and enthusiasm – and the same goes for buying an existing business. You need to demonstrate an understanding of the industry, business acumen, and commitment. You need to be clear on how much you need. Thoroughly research costs and understand how the flow of cash in your business will influence your ability to repay a loan.
Before getting business loans, you should know what banks look for and prepare for it:
- Character and credit history of the borrower
- Loan documentation: financial statements, tax returns, and a business plan
- Cash flow history and projections for the business
- Collateral that is available to secure the loan
Get a credit report on yourself and your business. The smaller the business, the more closely the experience, know-how and overall character of the owner(s) will be evaluated. You are often judged on your personal credit – especially if your business does not have a long operating history.
You need to build a credit history to give banks an idea of how responsible you are – they will assume that you operate your business in the same manner that you manage your personal finances.
- You need to monitor what banks see when they pull your credit report.
- Check your credit report well in advance of seeking a loan because it can take up to four weeks for errors to be corrected.
- Continually monitor your credit to check for errors or omissions.
- Know your credit score. The higher the score, the lower risk you pose to lenders — and the lower interest rate you will be able to secure.
- Every commercial lending application you submit will be listed on your credit record – if you are turned down by one lender, the next will see that you were declined already. Make sure to do everything you can to get it right the first time.
Be prepared to have several key documents on hand before you even set foot in a bank. These should include personal financial statements, tax returns, monthly cash flow projections, and a well-prepared business plan.
You will need financial statements for your business to show how much it’s worth and how much money you are making. Prepare detailed pro-forma statements. These give projections about what your business will be worth going forward. Be sure you have an updated business plan. Prepare a plan with as much detail as possible – including bios of you and your partners, your track record, your strategies and advantages, and more. Supply a well-organized plan of how you intend to use the loan.
