How can I borrow money using my invoices as collateral?

If your business is in a cash flow crunch due to slow paying customers, then welcome to the club. There are thousands of business owners going through everyday challenges trying to keep their business afloat. You would think it would be lack of sales, but you would be surprised to know that many small businesses start with a small business loan, savings accounts or credit card and later realize the much more operating capital is needed than originally planned.

The number one failure in business today is the lack of working capital. There is a cash flow cycle that many business owners are not aware of if they sell on a credit bases. If you do not plan ahead, you will run into a brick wall once you are out of money to continue day to day operations. If you can think of the last time you drove for a long road trip, you probably planned where you would fuel up and how much money you were going to need for fuel cost. An 800 mile drive may require 3 fill ups. The same planning should be done in a business selling credit sales, it is going to need cash fuel to fill up the checking account more often than you think. If you offer net 30 day terms on your invoices, then plan to get paid in 40 to 50 days on good paying accounts and 51 to 75 days on slower paying customers.

How much money will you need for financing your customers? That’s right, you are now becoming the interest free bank for your customers. In addition to financing your customers, you will need cash flow for payroll, inventory replenishment and fixed expenses, your business adventure should plan to have enough working capital for 120 days before receiving your first payment. Add up 4 months of your total cost of goods and fixed expenses based on the planned sales and you should be able to figure out how much money you should have to sustain a successful business.

If you don’t have access to more working capital, what’s the other alternative? If your business today is increasing sales, has credit worthy commercial customers that owe you money and your business is free and clear of any liens. Your business may qualify for invoice factoring.

Invoice factoring is a financing method used by many fast growing businesses. Factoring companies specialize in purchasing your invoices and advance you cash the same day or within 24 hrs of verification. The process to set up takes about 5 to 7 working days and the business owners do not need good credit scores for approval. Factoring companies rely mainly on the credit worthiness of the customer because the invoice for delivered product or service is the collateral used to fund, not your credit score or financial statements.

With this type of financing, your business growth is unlimited. Your sales are converted to immediate cash and can pay your vendors with early payment discounts, make payroll and pay your bills for every day operating expenses.

How much does invoice factoring cost? Factoring companies charge discount fees based on the value of the invoice. If your business accepts credit cards, then you are already factoring to a degree. For example, your credit card merchant charges you a discount fee of 3% and you receive 97%. A factoring company works almost the same way but the advance and discount fees may vary depending on volume and industry.