Instant Factoring Quote

As low as 1.15%

Article: Finance Your Company Using Your Sales As Collateral

There is a reason why most small business owners cannot qualify for a business loan: most banks and financial institutions usually demand that applicants have substantial collateral, impeccable financial statements, and a multi-year track record of growing profits. Obviously, most owners can’t meet this criteria. For starters, most have sunk all their money into their companies. Their business is their biggest – and often only – asset. And, as many small business owners can attest to, profits can be bumpy – not as smooth as those of a larger company. While the businesses may be doing well, their financial statements are often less than impeccable.

But how can you grow your company if you can’t get financing?

This problem is common. You need financing to grow your company, but the bank will not offer financing until your company grows and shows substantial profits. It’s a catch-22 and is particularly frustrating for business owners whose biggest assets are their sales – or invoices. While many institutions are happy to take invoices as collateral, it’s often not enough. They want hard assets as well. However, one form of business financing does allow you to use your sales as collateral: factoring.

Can’t wait for customers to pay?

For many business owners, offering payment terms to commercial clients can be quite a challenge. Waiting for 30, 45, or even 60 days for payment is not easy – especially when you have bills to pay. It’s very easy for an owner to lose track of cash flow and suddenly find themselves without the money to pay employees, rent, or suppliers. You can try to juggle payments, but that approach only goes so far.

You are left with two options.

Option 1: Ask your customers for a faster payment

Your cash flow would probably be OK if your clients paid quickly – say in 5 to 10 days. One alternative is to simply offer a discount for quick payment. If they have the cash, this offer can work to their advantage because it increases their profitability. While offering early payment discounts can also improve your cash flow, it’s not always reliable. Clients pay quickly only when it’s to their advantage and can revert to their old payment habits without notice.

Option 2: Finance your invoices

Your next option is to finance your invoices, using your sales as collateral. Invoice financing works by partnering your company with a factoring company that finances your invoices based on their credit profile. They advance money to your company based on your invoices, which provides immediate funds that you can use to pay operating expenses. The transactions are self-liquidating, which means that they settle when your clients pay on their regular schedule.

The advantages of option 2

Financing your invoices has a number of advantages for your company. It provides your business with predictable revenues because you can control which invoices are factored and finance them only when you need funds. But, more importantly, the solution allows you to offer terms to your best clients while minimizing the concerns associated with slow payments – allowing you to take on more clients and handle larger sales. When used correctly, invoice financing can help propel your business to grow.

Invoice financing is easier to get than most conventional funding products. The most important qualification requirement is having creditworthy commercial clients because their invoices, and their ability to pay them, are what is backing the transaction. Aside from that, your invoices should be free of liens, and your company should not have legal or tax problems.

Return to the Business Financing Resource Center.

Previous Article: Alternatives for Companies That Can Get Small Business Loans

Next Article: Business Financing Options for Small Companies