Financing Options From Inside Your Business¹
Need to finance your business without giving up equity? It is possible to “pay as you go” to fund your business through your operations. The three common ways to accomplish this is through factoring, asset-based financing, and accounts receivable financing. These methods give you the cash flow your business needs by using hard assets, money owed, and future payments from customers as collateral.
If you are a risk-taker and have extreme confidence in your business, asset-based financing could be for you. It’s a very simple concept that funds your business by using your assets as collateral for a business loan. The trick is using assets that are easily sold. Vehicles and real estate are great examples of assets that a bank would enjoy taking as collateral. Specialized equipment isn’t as desirable by a bank because it is not as easily sold, so they would most likely not give you a loan based on the true value of that machinery.
Just remember, if you decide to go with asset-based financing for your business, defaulting on that loan could put you out of business! If the collateral is vital to your business, you better do everything in your power to keep from defaulting on your loan.
Have you ever wondered how businesses were able to extend credit for products sold? Often times this is done through factoring. This type of financial transaction uses a third party to offer cash for your accounts receivable. Instead of waiting thirty to sixty days for the customers to pay for their goods, you can get a third party to pay you the cash now. The downside is factors charge interest for their services, but the price can be worth it to even your cash flow. Factoring also allows the business to get cash without giving away equity to traditional investors. If you need cash now, here are three ways to do it with factoring:
- Advance factoring - this is also called discount factoring. The factor will give your business a credit and risk evaluation, and then attach an interest rate based on the assessment. From there, you sell the goods and then get cash immediately by assigning the accounts receivable to a factor. No more stressing out about waiting a “net 30 or 60” days for the money, you get it now!
- Maturity factoring - keep your businesses A-1 credit rating with maturity factoring! This method is similar to advanced factoring, but the factor pays based on the average maturity date of your company’s monthly sales.
- Collection factoring - using collection factoring is great if your business is struggling to collect on your account receivables. The fee is higher, but the factor takes on the responsibility of collecting the money from the customers, which can improve receivables turnover.
Even Cash Flow with Credit Financing
You may have been taught not to count your chickens before they hatch, but borrowing money based on future sales projections could help your business. Lenders will evaluate your past and future sales, and loan you money based on those calculations. They will also take a pre-determined percentage of your future sales to get their money back. Unfortunately this credit financing can take months to obtain and often comes with a large accounting bill.
By using these methods, your business will thank you for a healthy credit rating and even cash flow. However, asset-based loans and factoring do add to the operational costs of doing business. Weigh the pros and cons carefully before you sell off part of your company's future.