Stimulating Small Business Cash Flow With Process Similar To Factoring Receivables
The focus of small to mid-sized business owners is growing their company and finding ways to compete with competitors as well as larger entities
. It can often seem like they live by the accounts receivable and accounts payable cycle month to month without ever getting ahead.If this sounds familiar, there is a new trend that can break the cycle and put working capital back into the hands of small to mid-sized business owners sooner rather than later.
Factoring receivables is an alternative to conventional bank loan financing. However, the business owner is still not in complete control. With invoice financing, he gets to call the shots.
This process is not a loan program, but more like an advance on money that is owed to the company anyway. Here is how it works, how it differs from traditional small loans and what the benefits are:
1. When a small or mid-sized business applies for a bank loan, they must show what the money will be used for. This is an extensive process in itself, but that isn't the end of the paperwork. In the end, the fate of the company is in the hands of the financial institution. If approved, the bank sets the stipulations-payment schedule, interest rate and sometimes onerous requirements, including all-asset liens, personal guarantees and restrictive covenants.
2. Invoice financing, a process similar to factoring receivables, is a low-risk method of getting access to cash immediately. Invoices are sent out to customers and payment may not arrive for a couple months or more.
If an opportunity arises that requires cash, a small to mid-sized business can miss out on a growth opportunity if their working capital is tied up in accounts receivable, inventory and bills. Instead of giving the bank control, the owner can take control and pursue alternative financing options.
3. Like a loan application, businesses are required to fill out an online invoice financing application and provide financial documents. Once approved, the accounts receivable sellers are validated. After everything has been approved, the owner can pick which accounts receivable or outstanding invoices he wants to list on the auction site. Buyers bid on the invoice, and the winning Buyer purchases the invoices, paying an advance to the Seller.
Once the account debtor pays the invoice and the Buyer has been paid back minus transaction fees, the transaction is complete and the Seller receives any remaining funds. The auction marketplace controls the payments between the two.
4. Unlike a bank loan or the factoring receivables process, the Seller controls the minimum advance amount, maximum discount fee he will pay, when the auction ends and what the buyout price will be. And, there is no limit to how the money can be used.
The auction site creates a meeting place for sellers and buyers for this alternative to factoring receivables.
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