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Cash flow is crucial to the success of any business. A business can be profitable, but if cash flow is poorly managed, there can still be problems like delayed payments and insufficient funds for payroll.
Delayed payroll lowers employee morale and productivity. It can also increase employee turnover rates if it happens frequently. It is a considerable loss when talented, hardworking employees resign to seek better opportunities and pay elsewhere. Therefore, business owners should do all possible to make payroll on time.
But what if there is a problem with cash flow and it becomes increasingly difficult to make payroll on time? Where can business owners get funding to improve their cash flow? We’ll look into solutions for these challenges and the various advantages of
Cash Flow Financing Sources
When businesses run out of cash, their most common and first solution is to borrow money from traditional lenders. These are banks and credit unions, long-established financial institutions with extensive reserves and can, therefore, grant large loans at low APR (the annual percentage rate is the yearly cost of borrowing money and covers the loan interest plus associated fees).
Businesses that cannot get approved for loans from banks and credit unions can seek financing from alternative lenders: non-banking financial companies that typically offer only financing services. They provide appealing, non-traditional financing options with lax requirements and fast processing. For example, it only takes up to two days to screen, process, and finance applications for payroll factoring, a well-known example of non-traditional financing.
Now that we’re on the subject of financing examples, below are some options businesses can explore if they have a negative cash flow (more money is spent than earned within a given period).
Loans for Improving Cash Flow
- Payroll Factoring
Payroll factoring is the practice of selling unpaid invoices to a factoring company for a small fee. Factoring companies can pay as much as 90 percent or higher of the total of the purchased invoices in advance. If you are confident that the advance will cover your employees’ payroll, you should consider factoring.
The advantage with factoring to meet payroll is that it doesn’t put your business in debt. The capital you receive is not a loan, but an advance to the invoices your customers have yet to pay.
Invoice factoring works best when you have customers who pay on time but take full advantage of your 30, 60, or 90-day payment terms. So if you’re short in funds for payroll but have reliable customers who habitually pay a week or two after your payroll is due, factoring would be a good source of working capital.
- Traditional Loans
Bank loans are ideal if you need substantial capital that your pending invoices cannot cover. The federal government regulates institutional loans, and although they have high screening requirements (a good credit score, for starters, is a must), they offer the benefit of flexibility. As a result, businesses can spend the money where they need to – including payroll.
- Government-insured Loans
Government-insured business loans offer the additional benefit of a repayment guarantee by the government. SBA or small business loans are prime examples. These are a variety of loans and grant programs designed to aid businesses that have exhausted all financing options. Banks provide the financing, but the government guarantees the loans.
The government shoulders the greater risk in these loans, so banks are more likely to grant large loans to business owners. Unfortunately, the application process is highly competitive, plus the bank may require personal guarantees – assets like real estate, cars, business equipment, or inventory. Therefore, consider government loans as a last resort if all other options are unavailable.
- Other Types of Working Capital Loans
As the term suggests, working capital loans refer to financing used for funding working capital. Technically, payroll factoring and business loans can also be considered working capital loans. But if you are looking for other options, here are some alternatives:
- Revenue-based loan – Lenders loan an amount based on a business’s historical and projected revenue performance.
- Asset-based loan – Lenders offer an advance based on the company’s liquid assets. It also holds said assets as collateral, so the amount loaned is always less or equal to the assets’ value.
- Line of credit – A flexible and revolving loan similar to a credit card, a business line of credit allows companies to withdraw funds anytime as long as they still have enough credit left. Interest applies to the borrowed amount, and the credit paid is credit the business can borrow again.
Which Cash Flow Financing Option Should You Choose?
The best financing option depends on your business’s current financial situation. If you can meet a bank’s requirements and are comfortable with the terms of a traditional loan, proceed with the more familiar bank loans. However, if you don’t qualify for conventional loans because of a low credit score or need working capital asap and cannot wait weeks or months for a bank’s loan approval, then non-traditional loans like payroll factoring is an excellent alternative.
The other working capital loans are also something to consider. However, asset-based loans should be taken with caution and only if a business is confident it can pay off the loan on time. Otherwise, they run the risk of having their assets seized by the bank.
The Advantages of Factoring to Meet Payroll
Invoice factoring is arguably the easiest and most convenient method of improving cash flow and making payroll on time. Payroll factoring is perfect when you have a sure cash inflow two weeks from now but must pay your employees’ salaries this week. It is a short-term remedy for a negative cash flow, and if the advance is managed wisely, it could nudge the business towards a positive cash flow (more money comes in than out within a given period).
Solve your immediate cash flow deficits and avoid delaying payroll through factoring. You can learn more about it here at Business Factors & Finance. Email firstname.lastname@example.org or call 800-672-3844. Then, when you’re ready, fill out our application form to get started.
Improve Your Cash Position
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