For millions of people, small business is their life, and we mean that literally! Countless people rely on the success of their small business to put bread on the table, a roof over their heads, and to provide a useful service or product for other people. After pouring in all their blood, sweat and toil to launch their business and keep it afloat, it only makes sense that their growing business should continue expanding at a healthy rate. However, sometimes cash flow problems arise with particular businesses.
Cash flow problems can affect nearly any kind of business, large or small. Small businesses particularly struggle with the hassle of cash flow issues as starting and stabilizing a new business can often be an unpredictable, unstable and volatile process. That’s why The Commercial Finance Group is here to provide your growing business with cash flow solutions and accounts receivable financing options to equip you with the necessary working capital to appropriately expand your business operations or working capacity.
In today’s post, our receivables financing company is going to go over some of the pros and cons of accounts receivable financing to help you determine what the right financial solutions are for your business. The Commercial Finance Group has and passion and a dedication to helping small businesses flourish and realize their potential, so if your business situation aligns with our accounts receivable financing services, then contact us today. Let’s take a look at the various pros and cons of accounts receivable financing.
Pro: Fast Cash
Though there are numerous pros to accounts receivable financing, we’re going to start out with a huge strength and fairly obvious point about accounts receivable financing: fast cash. Your company may need immediate cash for a variety of reasons, such as buying raw materials, buying inventory, doing renovations, or making payroll, just to list a few good reasons. Naturally, the cash that you use for these business projects usually comes from the customers who pay for your products or services.
However, if your customers are rather slow to pay their bills, leaving you temporarily high and dry, then your business will have to look for other ways to cover your expenses during a cash flow brunch. If raising cash is an immediate need and you are having great difficulty getting sufficient funds through other means such as a bank loan or line of credit, then accounts receivable financing is an effective, viable option to finance your business operations. Often with accounts receivable financing, you can receive cash with 5 to 10 days, although sometimes you can receive cash in as little as a few days depending on your situation.
Con: Contract Length
If you do decide to go with accounts receivable financing services, make sure that you’re able to commit to the entire contract period. It might be possible that the length of your contract will not be as short as you would ideally like, so keep that in mind. Some receivables financing agreements can be rather lengthy – up to two or three years in certain cases – which might not be the best thing for your business. The market has been accepting of this, however, and shorter contracts are becoming more and more available and acceptable in the world of business financing.
When you go into a receivables financing contract, just make sure that you negotiate the contract length with your factoring company in question – you might only need immediate cash or short-term financing, and being locked into a long-term contract might not be the best fit for your overall business needs.
Pro: Freed Up Working Capital
If receivables financing didn’t help free up your business’ working capital, then what would be the point? Having capital tied up in inventory is a huge problem for many business owners, especially if you run a retail business. Accounts receivable funding can quickly free up a lot of that working capital so you can use it to buy more inventory and thus grow your business at a more accelerated rate.
In other words, you won’t have to worry about missing a great deal on inventory if you have cash already waiting and ready to go. Plus, you can use the instant cash to generate growth by hiring more people to bring in more business, spend it on marketing, or do whatever you see fit as a business owner to expand and improve your overall business operations. Instead of watching your capital idly sit on your balance sheet in the form of unpaid invoices, accounts receivable financing can help free up this money and put it to work in terms of growing your business.
Con: Loss of Control
Don’t worry, you won’t lose the ownership of your own business when you employ receivables financing services like The Commercial Finance Group. However, you may have to give up some control of certain business processes, such as who you do business with. For instance, the factoring company in question could tell you that you must stop doing business with a particular customer, client or group of customers because of a poor credit history or credit rating.
Pro: Time Saved
They say that time is money, right? In the business world, time is constantly of the essence and as a busy business owner, you can’t afford to waste one minute. Fortunately, with accounts receivable financing, you can save time and effort that would otherwise be spent on collecting money due from customers. Most factoring arrangements will include the process of obtaining money from the actual customers, so it’s one less thing that you’ll have to worry about as a pre-occupied business owner.
Outsourcing your accounts receivable management services to another company will free up your resources to focus on other, more productive and lucrative areas of business, such as selling. Companies like The Commercial Finance Group will take care of getting the money, and then you can use your own time and money normally spent on collections and redirect it to making money and building your business. As a business owner, you know the importance of putting your time and personal efforts toward sales, marketing, and client development. Think of accounts receivable financing as a way to take some stressful items off of your own to do list.
Con: Your Rate is Client-Based
Receivables financing is considered a somewhat unique form of alternative business funding because instead of being judged based on your own business credit, your access to a business factoring loan is actually based on your clients’ credit. If your business has an unfortunate number of slow-paying clients or has some clients with less-than-excellent credit, keep in mind that these aspects of your client base can affect the discount rate that you pay to the factoring company.
If the accounts receivable company finds that your clients are unreliable or do not meet whatever their own standards are, then you may also receive a lower percentage of cash up front. Your clients’ poor creditworthiness or uncertain payment history might even cause you and your business to be ineligible for receivables financing, so you should also be aware of this.
Pro: Retained Business Ownership
Another option for business finance is to raise capital by selling equity in your business. However, many small business owners do not want to give up ownership, or even partial ownership, of their business. Often, the case for small businesses and startups when growing in the early stages is to heavily rely on outside investors in order to keep successfully running and growing.
While outside investors might seem like a good idea depending on your situation, it does force you to give up a percentage of your company ownership each time you go back for additional funding – not a good idea if you’re looking to retain the ownership of your business. Fortunately, accounts receivable financing is not like this. With accounts receivable financing, you will retain sole control of your company while still getting the necessary capital that you need to operate and expand your business practices.
Con: Stigma
This con is more of a reputation-based con versus an actual financial-based con. Some, but not all business owners feel like there is some sort of ‘stigma’ that goes along with accounts receivable financing. No, this stigma is not related to factoring being perceived as ‘unfair,’ because business factoring loans are a long-standing, viable and legal financing option for businesses. Rather, this stigma comes from the sense that some people might think that if your business is relying on receivables financing from a lending firm, then this is a ‘bad sign’ that your company is struggling and may go out of business in the near future.
When customers hear that they will no longer directly paying you but rather paying their bills to a receivables financing company, it might make them think that your company is having cash flow problems or is at risk of going out of business. Simply be sure to communicate upfront to your customers and be proactive with them to explain the situation and assuage any doubts or fears that they might have. After all, you’re in this for the long run, right?
Contact The Commercial Finance Group Today
Without the long wait and hassle of a traditional bank loan, our receivables financing options at The Commercial Finance Group are what your business needs to take things to the next level. Ready to get serious about your business operations? Contact us today to see what our accounts receivable factoring services can do for you!
