 Do
you own a growing business that needs financing? If you are like most
business owners, whenever your business needs money you head over to
the bank. Unfortunately, as most small business owners soon find out,
most banks do not lend money to businesses unless they have
significant collateral and a history of successful operations. This
presents quite a challenge for business owners. When banks are not an
option, small business owners turn to what is known as the alternative
financing funding market. Although the financing options discussed in
this article fall under the alternative financing category, they are
actually quite widely used and should be considered mainstream. Most
major companies (including public companies) have used this
alternative financing at one time or another during their growth
history. Most of the tools described in this article can only be used
by businesses that are already in operation, and whose main
requirement is working capital. Although startups can benefit from
these tools, the companies will need to be in operation for a little
while and have a growing list of clients.
General Invoice
Factoring Invoice factoring (also known as accounts receivable
factoring) is ideal for business owners who cannot afford to wait 30
to 90 days to get paid by their clients. It allows a business to sell
invoices from commercial customers to a financing company for
immediate payment. The financing company buys the invoices at a
discount and waits for the customer to pay. The main advantage of
factoring your invoices is that the financing company makes its
decision using the credit of the payer, rather than yours. That means
that if you own a small company that is doing business with a large
credit worthy company, you are almost certain to have the transaction
approved. Another advantage of factoring is that it does not have set
limits like lines of credit. The level of financing is limited only by
the amount you sell to credit worthy clients. General factors can work
with most industries, although there are two main industry
subspecialties - freight bill factoring and medical factoring.
Freight Bill Invoice Factoring
Trucking companies tend to be very cash hungry businesses. The
owners need money to pay their drivers, pay gasoline and pay
suppliers. However, most trucking companies also work with a high
volume of freight invoices from credit worthy clients. That makes
freight bill factoring an ideal solution for their cash flow issues.
Just like in general factoring, the factoring company buys the freight
invoices from the trucking company for immediate cash.. Furthermore,
the risk for these types of transactions is lower than in general
factoring. This means that trucking companies can qualify for
preferential financing terms.
Medical Factoring Most
medical industry businesses (doctor's offices, hospitals, medical
testing centers and medical supply companies) make the bulk of their
earnings by billing 3rd party insurance companies, Medicare and
Medicaid. Unfortunately, insurance companies are notorious for paying
their invoices in 30 to 90 days, creating cash flow problems at the
medical office. Factoring medical offices is a subspecialty of general
factoring. Given the complexities of the insurance industry, it
usually requires the participation of a factoring company with
extensive industry experience. Generally speaking, the medical
factoring company will provide you with financing based on your NET
collectables rather then your gross collectables. They will also need
to be part of the billing process, to ensure that they finance the
right amounts. Due to its complexity, medical factoring is only
accessible to medical businesses making at least $100,000 a month.
However, if your business qualifies for it, you will find that it is a
great tool to streamline your cash flow and grow.
Purchase Order Funding (a.k.a PO
Financing) Most distributors and import/export companies tend to
be very cash hungry businesses, in part because of how the sales
process works. Usually, the process starts when the distributor gets a
purchase order (PO) from a client. They then purchase the items from
their supplier, who then drop ships it to the end customer. This works
well as long as the company has enough money to pay the suppliers and
wait for their clients to pay for the product. However, sometimes a
payment can take up to 60 or 90 days to arrive, creating a big cash
flow challenge for the distributor. Other times, the company may
become too successful and get a purchase order that is too big for
them to finance. In these instances, the company should consider
purchase order funding financing. With PO financing, a finance company
handles your supplier payments and ensures that the goods are properly
delivered. Once the client pays for the product, the transaction is
settled and all parties are paid. PO funding is a product that truly
allows you to grow your company - sometimes exponentially - while
using someone else's money.
|
