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One of the significant challenges of running a business is acquiring money to fund new equipment or materials necessary for the product or services you offer. Chief financial officers with low-risk appetites may decide to buy only when the company has enough money. But, unfortunately, here’s one of the realities in business: if you don’t have the money now, chances are you still won’t have enough money soon. So it would be best if you found ways to have the capital to afford the materials you need to keep your business running.
One of the short-term solutions you can use is factoring. It is one of the most convenient financing options for businesses with a need for immediate cash flow.
Factoring: The Best-Kept Secret in Business
Invoice factoring is a money management and capital acquisition technique that has existed for decades but was mostly practiced in the textile and manufacturing industries. Today, it is gaining more popularity as businesses of all sizes now seek capitalization opportunities wherein the risk of falling into debt is minimized.
Factoring is selling invoices of accounts receivables at a discount to a factoring company. In return, the business gets an advance of the accounts receivable – typically between 75 and 96 percent of the sum of the invoices. The business can then use the money for whatever purpose necessary.
For their part, the factoring company becomes in charge of obtaining payment from the customer. Once the balance is paid, the factoring company will deduct their service fees and the advance the business received. If there’s still money left, the factoring company will return it to the business.
Benefits of Invoice Factoring
Why should you consider invoice factoring to finance the purchase of raw materials and other necessities for your business? Here are three excellent benefits to look forward to:
- No credit check required – Factoring companies don’t look at the business’ credit history. They are more concerned with the business’ customers and their trustworthiness in paying their invoices.
- Obtain funds in 24-48 hours – Once approved by a factoring company, a business can get an advance on their accounts receivables within two days. It’s a big help when your cash flow dries up, and you need money for your business’s day-to-day operations.
- Non-recourse option – Non-recourse factoring transfers the commercial credit risk from the business to the factoring company. The business is not obligated to repay the factoring company if the invoices are unpaid, making factoring an ideal financing option. Even better, non-recourse factoring can apply to any business or industry. So it is possible to seek non-recourse factoring for manufacturing companies, staffing agencies, IT companies, etc.
Other Financing Options for Businesses
Of course, there are other ways for businesses to acquire capital besides invoicing. If you have no overdue invoices or invoices with extended payment terms (perhaps up to 120 days), you’ll have to consider other financing options.
- Bank Loan
A traditional loan is always a helpful fallback when you’ve exhausted all other options that don’t require a high enough credit score and other guarantees the bank or lending institution might ask for.
The advantage of business loans is that you can apply for a significant amount and have complete control over the money. So if you need a large sum to buy materials and equipment for, say, a new product that you want to launch, a bank can provide the capital you need. Moreover, loans aren’t tax-deductible, and you can write off the interest payments as business expenses. Bank loans, therefore, are ideal for manufacturing companies and other businesses that often need a large capital.
- Business Line of Credit
Similar to how credit cards work, a business line of credit gives businesses access to funds whenever they need them. Unlike with bank loans, there’s no need to apply and get approved for funding when you need money; if the sum you want to withdraw is within your credit limit, you can obtain the funds right away.
What’s great about a business line of credit is it’s a “revolving” loan, not a one-time lending option that you need to repay once. After paying back the amount you borrowed against your line of credit, you can borrow funds again should another need arise.
- Vendor Financing
If you need money to finance materials, here’s another sound option: seek financing from your suppliers or vendors. Unfortunately, not all vendors offer this: a vendor has to have supreme confidence in a business’s profitability before it agrees to supply materials without getting paid upfront. However, if you’ve had a long and good relationship with a vendor, they might consider financing the materials for your next project or when your supplies run out.
Vendor financing comes in two forms: debt vendor financing or equity vendor financing.
- Debt vendor financing works a bit like invoice financing: the vendor lends a business money, which the latter will then use to buy the vendor’s inventory. The business pays the vendor back with sales from their products, plus interest. If it can’t pay back the vendor, the loan is written off as a bad debt, and the business can no longer seek financing again with the vendor.
- With equity vendor financing, the vendor supplies the materials in exchange for company stock. The business won’t have to make cash payments, and the vendor can claim share profits and dividends as payment.
What’s the Best Financing Option for Manufacturers?
Manufacturing companies with cash flow problems would be burdened with finding funding for much-needed materials for their merchandise. Without a healthy cash flow, a manufacturer cannot afford to repair equipment, invest in crucial upgrades, and stay stocked on critical raw materials.
Your choice will depend on your circumstance. However, if you seek immediate financing that won’t put you through the hoops of getting a loan (e.g., submitting a ton of paperwork, meeting with lending officers, preparing your credit history, ensuring your credit score is high enough), and if the sum you need is not too significant, then invoice factoring for manufacturing companies would be an excellent choice.
Factoring can replenish a manufacturing company’s cash flow without putting it at high risk of debt. This is because, technically, businesses that sell their invoices to factoring companies aren’t borrowing money. After all, they receive the advance to the payment they are due to receive. As a result, manufacturers that are strapped for cash can get funds to buy much-needed materials, but they won’t have to scramble to pay back their factoring company in the following months.
With the increased working capital, you can:
- Cover critical daily operating expenses,
- Make meaningful investments,
- Take advantage of early-payment discounts from your suppliers, and
- Avoid the repercussions of cash flow instability (e.g., stunted business growth, payroll delays, and tarnished relationships with suppliers).
Whether your business is in manufacturing or another industry, invoice factoring can serve you well. Explore our website for more information on how factoring works, particularly for the manufacturing industry.
Visit our contact page to apply for invoice factoring today.
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