A Flexible Alternative to Business Lines of Credit

Companies that sell to commercial and government customers almost always get paid for their services on net 30 to net 60 day terms. This means that they have to wait up to 60 days from the time of invoicing to be able to collect a payment. Most firms cover expense during this delay by using their cash reserves or relying on a bank line of credit.

This strategy tends to work well, unless you have limited cash reserves and are unable to get a line of credit. Institutions underwrite their lines of credit much like business loans and other business financing products. They require two or three years worth of financial reports about your company. They require that the company and the owners have substantial assets. And, they require that all the records be spotless.

If your company cannot meet the institutions funding criteria you will usually be out of luck, especially in the current economic environment. Conventional underwriting standards are very strict. However, there is an unconventional approach to financing your business that works for many industries.

As mentioned earlier, most companies that have cash flow problems have them because they can't afford to wait 30 or 60 days to get paid by clients. This gap can be covered using invoice financing. Invoice financing provides an funds advance on your slow paying invoices giving your company the necessary liquidity to cover expenses while waiting to get paid. One advantage of invoice financing over other solutions is that you can leverage the credit quality of your clients to your advantage. In an invoice financing transaction, the funding company buys the invoice at a discount, with the expectation it will be paid in 30 to 90 days. If your clients have good commercial credit, the funding company will likely buy the invoice. This feature enables small companies whose biggest asset is a solid roster of clients to use invoice financing.

A second advantage of invoice financing is that it grows with your sales. Your funding line will usually be determined by the size of your invoices and the credit quality of your clients. This funding flexibility enables small companies with big potential to grow organically.