You may have a highly profitable business, but you can still find your business having a constant shortage of cash. The probable reasons could be carrying significantly high debt or providing extended credit terms to your customers. Taking out a loan is not an ideal solution since it will put an additional burden of debt on your business. This is why it’s important to resist the temptation of taking additional loans since it will be even harder to keep your liabilities in check. It is always recommended to consider having a funding option that will help you pay your loan and still have enough cash to utilize for your business’ growth.
Accounts receivable financing is an effective way to boost your cash reserve without increasing your debt. Factoring your invoices or selling them to a factoring company can get you immediate cash flow, and you need not worry about late payments from your customers. It is a quick and convenient way to resolve the cash shortage problems that you may have been experiencing in recent times.
After buying the invoices, a factoring company seeks approval from the client’s customer (s) on the invoices and subsequently pays an advance amount to the client that typically ranges from 40% to 90%. The balance is paid once the factoring company collects the invoice amount from the customers on the collection date. For these services the factory company deducts a discount fee (typically between 2.5% and 7.0%).
So, you can now easily solve your business’ persistent cash crunch problems by getting immediate cash through factoring, and can have a steady cash flow. Your company’s balance sheet will now look healthy due to high cash to debt ratio.