Leveraging Through Alternative FinancingIn order for a company to make a healthy profit and operate most efficiently, it must have positive cash flow. When a conventional loan institution turns the business down for a small business loan, company officials should look into alternative financing as a means to temporarily finance the company's cash flow.
Even though alternative financing is more expensive than conventional loans, there are definite advantages. A business can utilize factoring as a debt-free line of credit. Once a company factors invoices, it can have access to additional funds automatically as the company grows. When the company submits additional invoices and does a larger amount of business, the amount of funds available increases.
Factoring is a way of utilizing cash and equipment as business assets. Leveraging accounts receivable for badly needed cash is a way of utilizing the time-value of money. Money today is worth more than money tomorrow particularly when a business has an immediate need.
Leasing is another way to manage cash flow. Leasing allows companies to own by buying at the end of the lease for one dollar or buying the equipment for fair market value. Fair market value actually lowers the payments. There are also possible tax benefits from leasing.One should check with an account to determine what tax benefits might be advantageous.
Leasing also includes maintenance, installation, delivery, and software. Leasing offers one hundred- percent financing. It allows the company to conserve working capital. Acquiring equipment requires almost no capital expenditure.
Leasing also allows customers to pay for the equipment while the equipment helps to generate income. One of the advantages of leasing is it allows the company to stay competitive with the use of the latest technology. Fair market value leasing makes a great deal of sense for a company who needs to utilize the latest technology in order to be competitive.
The way leasing works is it is a contract between two parties where one party allows the other party exclusive right to use and possess its equipment for a specified period of time. A sole proprietorship, partnership, corporation, or LLC can lease new or used equipment.
Banks are more stringent in accepting risk when pertaining to conventional small business loans. So leasing and factoring are viable alternative to managing a company's cash flow.
Once a company becomes well established with a factoring company and develops a relationship it is also possible to factor purchase orders. It is a little more expensive and more difficult to qualify but certainly a way to do business with larger companies. This is most beneficial when a small company is doing business with larger companies and/or filling larger orders.
A business operates most efficiently when it spends the greatest amount of effort and time into providing products and services rather than making application for loans. Often, it takes a great deal of time not only to make applications but also to wait for decisions to be made on the applications. Most factoring companies will only require a few documents and will return with an answer within twenty-four to forty-eight hours.
When a factoring company gives approval, additional paper work will be required. A factor needs to be able to assume the first collateral position on accounts receivable. However, the factor will not tie up other assets in the company. After approval, it takes about a week or ten days to get the initial funding. Thereafter, invoices are paid within twenty-four to forty-eight hours. When the business has a loan from a bank, it is possible to get a bank or loan institution to subordinate to the factoring company.
When a company has to revert to using alternative financing, is that an indication the company will not succeed? There are several Fortune-500 companies that have financed in the beginning by factoring invoices. Factoring is a transitional and time-sensitive alternative used until a company is able to qualify for conventional financing. A very large percent of the companies in this country use leasing. More companies doing any kind of business to business or business to government have been using factoring since the 1980's even though factoring dates back centuries.
It is important for business owners and executive to know how to manage cash flow. When a company gets large orders that wipe out operating capital, it becomes less efficient in its operations.
Most of the businesses that do factoring have annual sales between $150,000 to $2,500,000 per year. The companies eligible for factoring invoice business to business or business to government. Most companies who do business with government can easily qualify for factoring. Factors are more interested in the credit of the companies who will be paying the invoices rather than the company benefiting from factoring.
When a company has been turned down for a conventional loan at a bank or loan institution, it should consider applying for alternative financing.
About the Author:
Russell Wardle is president of Corporate Capital Source. His company provides nationwide commercial financing, factoring and equipment leasing. Contact him at 801.676.0579. Also visit at: corporatecapitalsource.com