How Receivables Financing Can Help Service Providers
Receivables financing can be an excellent way for service providers to raise capital for there businesses. Most business owners understand the importance of having good cash flow. Without adequate money coming in, it is difficult for a company to pay their bills or keep operations going.
However, generating capital and keeping it flowing can sometimes be difficult. If a service provider invoices their clients it may take between 30 and 90 days before they receive payment for jobs they have already completed. This can put a strain on a business. Without an adequate amount of capital, they will be unable to meet their own obligations.
The majority of businesses that don’t have enough capital to pay their bills will be forced to take out a bank loan or line of credit. The same is true for companies that are interested in expanding or growing. Unfortunately, bank financing is not possible for everyone. A business that doesn’t have stellar credit, already has too much debt or hasn’t been in business very long may find it very difficult (if not impossible) to obtain a loan. When this is the case, there are often very few options.
Fortunately, one option that it is available to most service providers is receivables financing. Receivables financing allows companies to get the money they need without having to qualify for a loan and take on more debt.
Instead, they sell their receivables at a discounted rate, often times between 70% and 90%, to a factoring company. This company will pay cash for the invoices and then collect them from the businesses’ clients. The same terms that the customer originally agreed to will be those accepted by the factor. After the factor has received the monies for the invoices, they will return them to the company who originally owned them. The factor is then paid a fee, typically between 1.5% and 3.5%.
There are several advantages to receivables financing besides a business getting much needed capital. A factoring service can also act as a collection agency of sorts. They will go after a company’s clients if they are late pays. This can be great for small businesses that do not have a collections department. Factoring receivables is also cheaper than a traditional bank loan.
Companies only pay, as stated above, between 1.5% and 3.5% for the luxury of being able to use the factor’s money. This is generally cheaper then a business loan. Factoring also allows businesses to work with clients and fulfill orders that they might not only be able to afford. In most cases, as long as their clients have good credit, then receivables financing is an option for businesses.
Receivables financing can be very advantageous for service providers. It allows them to get their hands on money right way without the hassle or risk of bank financing.