It’s no fun out there is it? Banks are limiting access to credit. Customers are taking longer to pay. Your small business is likely facing longer pay periods from customers and those Net-30 payment terms no longer apply. This current financial crisis is forcing more and more customers to pay within 45, 60 or even 90 days. Meanwhile, your small business financing is murkier than ever and you’re taking a hit on your own business credit rating because your company’s payments to vendors and creditors are always late. If this is your current situation, don’t despair. There are some solutions to small business financing and they are quickly becoming the preferred method of borrowing for those looking to break away from those strong-armed negotiation tactics so often employed by banks.
Asset-Based Lending (ABL) Solutions
Your small business already has a number of assets it can call upon to not only improve your current cash flow position, but to secure the working capital you need to grow your business. Your company’s inventory, machinery, equipment, company cars, computer and office equipment, as well as your customer’s unpaid customer invoices, are all assets that can be used as collateral to improve your cash flow position.
A number of businesses of all sizes have decided to tap into their existing assets in order to secure the working capital needed to pay their day to day expenses and manage their business. There’s invoice factoring, or receivables factoring, as some like to refer to it. Essentially, this allows your small business to use your existing open customer invoices as a form of business credit.
The factoring company will value the open invoice on the likelihood that your company’s customer will pay the amount owing and on the age of the invoice itself. Receivables factoring has become more commonplace for small business owners because the value of the invoice is what’s used to determine the amount of available credit. The factoring company doesn’t need to know your company’s finances to make such a decision.
Understand Your Risk Tolerance
If you use receivables factoring, be sure to assess your own risk tolerance and that of your company’s customer. In essence, you must decide how financially sound your customer is and the likelihood they’ll pay their invoice. However, there are options suited to almost every small business financing need. In essence, receivables factoring is more like outsourcing your receivables collection.
The table and video above are taken from the post: Sample Receivable Factoring Excel Sheet: Effective Rates & Interest Rates
For more conventional lending options, a number of enterprises turn to these alternative financing companies in order to use their existing assets of inventory, machinery and equipment as collateral. A working line of credit can be established where the small business uses the existing liquidity of these aforementioned assets. However, if you opt to use this form of business borrowing, be sure to do your homework. As is the case with everything in business, there is both good and bad when it comes to using asset-based lending options.
For the most part, your company’s ability to secure credit won’t be based on your company's financial position, but on the value of your receivables and those assets you deem worthy enough for credit. This should give you some more ammunition with respect to your small business financing needs. Ultimately, in this economy, you need to have as many financing options as possible in order to ride the ups and downs of your customers' payment habits.
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