Have you ever had a time where sales were great, but cash was low?
A time that actually makes you question your business.
Asking yourself things like…
“Is this really worth it? I’m doing everything I want to do, but I’m still not getting where I want to be”.
Me too, and I know exactly how it feels.
That’s why I wanted to tell you about a product, or really just an idea – that takes care of this issue.
Accounts Receivable (A/R) Financing
Maybe you’ve heard of it, maybe you haven’t. It’s one of those hidden gems that doesn’t get talked about much.
A hidden gem that’s taken traditional cash flow products (like a line of credit) and made them even better.
How? Well for starters, it makes your life a lot easier.
I don’t mean to pick on a line of credit, because I really do think it’s a great tool for small business owners – but that doesn’t mean it’s perfect.
It’s nice to have a safety net, but a line of credit can create extra work. From making payments to ensuring you’re under the Borrowing Base Agreement (% of Accounts Receivable or Inventory) – it’s just extra work.
Now this might not be bad if your business has a consistent cash flow – but if you sell goods or services on credit (or invoices), then it’s not always that easy.
It doesn’t matter if you’ve had the best month, or even doubled your sales – you still need cash.
And that cash comes from paying customers – who for some reason, do not like to pay their bill until the absolute last day.
Surviving 30 days without the payment isn’t ideal, but since your competitors offer this option – you do as well. Without it, you’ll likely lose sales – an even bigger issue.
Actually, now that I think about it – that’s exactly what inconsistent cash flow does, it loses sales.
And in one way, shape or form – you’ve probably noticed this.
Maybe it’s turning down a job because you couldn’t pay for the materials up front, or maybe it’s limited inventory because you couldn’t purchase anymore – but either way, it’s hurting sales.
That’s the first place A/R Financing can help.
Let’s say you just completed a few big contracts and you’re waiting for the payments to come in. It’s a good chunk of change, and you’ve got a lot of different ways to use that money.
You’ll draw out a budget, along with a game plan – and you’ll see how much extra cash you have to play with.
Then you’ll get everything ready, and simply wait for the cash to come in. Once it does, the growth mode will instantly start to work.
So you wait. And wait. And wait….
And then you finally start receiving payments. But by the time you do, you’re back in the rat race.
You weren’t able to take on new contracts when you were waiting for these payments, and now it’s back to making money. Next month’s expenses are already eating up these payments.
It’s a vicious cycle, and it seems like it never stops.
But how would this look with A/R Financing on your side?
Well let’s say you completed those big contracts on the 10th of the month…
And then you receive the payments on the 11th. You now have plenty of time to implement your ideas.
You might not be able to triple your sales this month, but you’ll notice an increase.
And the same thing will happen the next month, then the next month…
So really, it just replaces your vicious cycle with a “growth cycle” – exactly what you’ve been looking for.
This is already great, but the benefits don’t stop there.
Another part that I really like (and I think it’d help you) is the payment process.
I mentioned this a little bit earlier, but other loan products require you to have “some” thought.
Maybe your payments are automated and you don’t have to think about it much, but with the revolving nature of a line of credit – this might be hard to do.
And that’s one of the reasons why I think A/R Financing is better than a line of credit – for some businesses.
How it Works
So I’m sorry, but I accidentally had a spoiler alert on how this process starts.
As I mentioned earlier, the process starts after you sell a product or service.
Then the next stage happens when you create an invoice and send it to the customer.
After this invoice is created and sent – the invoice is then submitted for payment.
And by payment – I mean from the lender. The lender that essentially buys your invoice.
They’ll buy your invoice for a set percentage, or as they say in the industry – “advance rate”.
The advance rate is usually around 90%. The remaining 10% is allocated between discount fee and reserve.
The discount fee is what they charge you to do this. It’s their form of interest.
This fee varies between lenders – but 2% is a good benchmark.
The remaining amount (the reserve) is then put into a separate account.
This account serves as a “emergency cash fund” for you and the lender. It’s only used if one of your clients decides not to pay their invoice – and the account is reconciled on a set frequency (usually monthly).
This puts the cash in your bank account right away – and you can use it however you’d like.
Then we’ll fast forward a few days, to the day your invoice is due (from the client).
Your customer is ready to pay, and they’ll send the payment.
How they send the payment is up to them. They can send it via ACH (electronic), or they can mail in a check.
But either way, it’ll go straight to the lender – AND the client won’t realize they’re doing this. They just think you opened a different bank account or opened a new P.O. Box.
Once the payment is received, the lender takes care of the processing – and you’re off the hook. That “loan” is paid off, and you didn’t even have to think about it – because you were busy growing your business.
Is A/R Financing for You?
This type of financing can help any business – but it’s really useful for certain businesses.
And these businesses come from three…..scenarios?
- New Business – Cash is always tight in the beginning, I probably don’t need to elaborate on that. And now you probably have a good idea on how it helps. A/R Financing pumps cash into a new business – giving them the capital and leverage to get their business off the ground.
- Growth Mode – In all seriousness, this is New Business 2.0. Both scenarios relate to businesses that need cash to grow, but Growth Mode is for existing businesses that are looking to take their business to the next level. The next level that creates more profit and less work (from the owner)
- Bounce Back – And then you have number 3. The scenario that every business owner wants to avoid – but some aren’t able to. This usually happens with unexpected circumstances, like a lost contract or large expense. In the same sense, this business is also in growth mode – just in a frantic way.
Each scenario is different, and every scenario will have a variety of businesses – but they all come down to the same thing. Cash to grow.
And in all fairness, there’s some businesses that don’t need this type of financing.
Those businesses include:
- An established business that doesn’t need to grow their profits…
- An established business with enough cash in the bank account to cover the next 2-3 months
- And an established business where the owner has reached their dream. The dream of less work and more money
Why won’t it work for these businesses? Because they’re already “there”. And by “there”, I mean where A/R Financing will take them.
It’d be like ordering an Uber to your house – just so you could go outside and say hi.
It’s Not Permanent
The last thing I wanted to mention is the needed commitment.
Switching over to this product can be a big decision for some owners – but it doesn’t have to be.
In fact, this type of financing isn’t designed to be long-term. It’s designed to grow your business, and if you’re not in growth mode – it’s time to switch back to other alternatives.
So what’s the average life cycle of this product? It’ll depend with every business.
New business owners usually have it longest, because they have the most room for growth.
Other scenarios, like the Bounce Back, might not have it that long. Maybe they just need cash injections for 3 months before they’re back on their feet.
I try not to worry about how long – I try to worry about how much.
How much you want your business to grow.
A/R Financing – Financing Your Growth
And that’s really all you need to know about A/R Financing.
It improves your cash flow by turning invoices into cash – immediately.
Which is probably why we consider it a Cash Flow Solution.
A solution that takes care of any cash flow concern, in many different ways.
Different ways like a Line of Credit, Purchase Order Financing, etc. etc. etc. There’s too many products to list, if you want to see them all – then please use the box below…
Questions or comments? Please let us know below – and we’ll be in touch!