An Emergency Business Financing Alternative

At one time or another, most businesses will run into cash flow problems. This happens even to the best managed businesses. It's not unusual for a business owner to be so focused in managing operations or servicing clients that they lose sight of their cash flow, until it becomes a problem. Then, the business owners go in a frantic search for the solution. If they have business financing, they tap their line of credit. If they don't have financing, they go to their financial institution and try to get a quick business loan. And that is usually where they run into a wall.

Most financial institutions provide financing based on your company's collateral, your assets, the strength of your financial statements and your track record. Few companies with cash flow problems can show solid financial statements. Furthermore, most institutions can't provide business financing quickly. Most require a month or two to complete the process. If your company needs emergency financing, waiting a month can spell disaster. However, ff you have a specific type of cash flow problem, there is an alternative that is usually easier (and quicker) to obtain than a business loan - it's called invoice factoring.

Most companies that that sell commercial goods or services have to give payment terms to their clients. This means that they have to wait up to 60 days to get paid for their services. On the other hand, they also have to cover their current business expenses regularly. This creates a timing gap between income and expenses. Companies manage this timing gap by paying for expenses out of their reserves, while waiting for customers to pay. Sometimes due to circumstances, the gap becomes unmanageable. And that is where companies run into problems.

The simplest solution is to close the timing gap by asking customers to pay quickly . This can work if you offer them an incentive, such as a 2% discount for quick payments. But ultimately, you will end up at the mercy of your customers payment habits. A better solution may be to factor your invoices.

Factoring provides your company with a quick payment for its invoices by using a financial intermediary. The financial intermediary buys your invoices for an upfront payment and then waits until your customer pays. This provides your company with the needed liquidity to operate and expand. The factoring company charges a small fee for this service.

Invoice factoring is relatively easy to obtain and can be setup fairly quickly -usually in a week or two. The most important qualification requirement is the credit quality of your customers - factoring companies can only finance your invoices to credit worthy customers. Aside from that, your company need to be free of liens and legal encumbrances. Invoice factoring an ideal solution for companies that need emergency financing due to cash flow problems.