If you have ever looked at your business’s financials and wondered whether you would have the cash to meet payroll or order new inventory, you know how important working capital is to keep your business running. Properly managing your working capital is key to your company’s basic financial health and continued success. It helps you maintain balance between growth, profitability, and liquidity.
Proper management of working capital, though, can be very challenging for businesses, across industries and company size. In this article, we’ll look at what working capital is and ways that businesses can boost their chances of securing it.
What is working capital?
Working capital is the difference between a business’s current assets and current liabilities or debts. Said another way, working capital is the cash you have access to in order to fund daily operations.
As a financial metric, working capital is a measure of how efficiently a business is operating, and how stable it is in the short term, indicating whether it has sufficient cash flow to cover short-term expenses and debts.
The challenges of maintaining working capital
Across industries, businesses can face common obstacles to maintaining adequate working capital. These can include:
In addition to the above, many businesses may experience difficulty in securing traditional financing. Businesses that are small, young, or rapidly growing may not be able to meet the requirements for bank financing and other traditional funding. It also may be that the terms and repayment schedules for traditional financing are difficult to meet while remaining profitable. For these reasons, many owners of small and medium businesses turn to alternative financing and investor financing to help with working capital.
Four ways businesses can improve their chances of securing working capital
Business owners facing a cash crunch can do a few things to improve their chances of securing working capital. These include:
Using invoice factoring to secure access to working capital
In invoice factoring, a company turns over its account receivables to a factoring company. The factoring company gives the business an advance and then follows up with customers for invoice payments. Once invoices are paid, the client company receives the balance minus a fee. Because it offers fast access to working capital without the difficulties inherent to traditional financing, invoice factoring can be a good option to solve short-term gaps in working capital for businesses at almost any stage.
Looking to secure working capital for your business? We can help. Prairie Business Credit is a national working capital provider to young, growing, or recovering businesses. We offer accounts receivable financing, purchase order financing, and equipment financing. Our company serves both as a trusted financial resource and consultant to entrepreneurs dedicated to building their businesses and ensuring their success.
Wondering if invoice factoring is the right financing method for you? Invoice factoring is a versatile financial tool for businesses of almost any size—and in almost any industry. An alternative to traditional financing, it can provide immediate access to working capital.
When a company factors its invoices, it sells its accounts receivable to an invoice factoring company. The factoring firm advances cash to the company and then collects on the outstanding invoices. The balance is paid to the company less a service fee. Invoice factoring is used in a variety of different scenarios, from start-up to high growth to recovery, and it can also be used across industries.
This article looks at how invoice factoring can help in different industries. Understanding how it might be used to address the unique dynamics of your industry or market can help you make informed decisions about managing your business's cash flow.
Manufacturing and distribution
Manufacturing and distribution businesses often contend with long lead times and production cycles that can result in extended or delayed payment terms. Sometimes seasonality creates revenue fluctuations that can cause cashflow gaps, which can hinder operations and growth. And, of course, the continued supply chain pressures of the last few years have also played a role.
How factoring helps: Invoice factoring provides quick access to cash, which can help manufacturing and distribution companies purchase raw materials, cover production and operations costs, and promptly fulfill new customer orders.
Transportation and trucking
Companies in the transportation industry often grapple with high operating costs, including acquisition and upkeep costs for vehicle fleets. Continued high fuel prices add additional pressure.
How factoring helps: Invoice factoring can help transportation industry businesses cover fuel and maintenance costs, meet driver payroll, and expand or upgrade their fleets, without the need to wait for shipper or broker payments to arrive.
Food and beverage
Food and beverage manufacturers and distributors must navigate variable demand and procurement of perishable ingredients that can make inventory management a challenge.
How factoring helps: With invoice factoring, businesses in the food and beverage industry can more easily maintain consistent inventory levels and ride seasonal demand fluctuations while also meeting supplier payment terms—in the end to satisfy customers in grocery stores, restaurants, and more.
Professional services businesses may face mismatches in revenue and expenses, especially during seasonal peaks and valleys or when a large client is late paying invoices or retainers. Some professional services businesses like staffing companies, IT, and skilled consulting firms commonly rely on invoice factoring to smooth out these financial cycles.
How factoring helps: With invoice factoring, businesses in the professional services industry can access working capital for needs like payroll as well as expenses like insurance premiums, IT and software investments, and more. Invoice factoring can give these companies access to the cash they need to meet immediate needs even when customer payments or retainers are delayed.
As a financing method, invoice factoring is versatile enough to meet the specific needs of a variety of different industries, including these as well as many more. No matter your industry, factoring can be a valuable tool to improve cash flow, manage expenses despite variable demand, and support company growth.
Looking for guidance on how factoring works in your industry? We can help. Prairie Business Credit is a national working capital provider to young, growing, or recovering businesses. We offer accounts receivable financing, purchase order financing, and equipment financing. Our company serves both as a trusted financial resource and consultant to entrepreneurs dedicated to building their businesses and ensuring their success.
Invoice factoring is a lifeline for many businesses, offering a quick infusion of cash to address a working capital crunch or service a new account. What does invoice factoring cost, though? And what determines factoring rates for invoice factoring?
This article pulls back the curtain on key factors that influence factoring rates to give business owners much-needed information to make decisions about invoice factoring.
What is invoice factoring?
Definitions first, though: invoice factoring is a financial tool for businesses of any size to gain access to working capital. It’s an alternative to bank financing when traditional financing is not an option or may take too long.
In invoice factoring, a business sells its accounts receivable to a factoring company. The business receives an immediate cash advance, and the factoring company collects the outstanding invoices from customers. Once it does, the factoring company pays the business the balance minus a service fee.
Factors affecting factoring rates
While “what does factoring cost?” is a common question, the answer can depend on a variety of factors. These can range from the risk the factoring company takes on in collecting on outstanding invoices to the type of factoring. Let’s break down each aspect for more insight on why and how they affect invoice factoring rates.
Finally, not all invoice factoring companies are created equal. Administrative and discount fees can shape rates and can vary widely between companies. Some companies may be more flexible with rates and terms than others, too. Be sure to thoroughly review the policies and fee structure when considering factoring your invoices. As a business owner, it’s crucially important that you make the best decision for your business by understanding the factors that determine factoring rates. When you do, you can use invoice factoring as a strategic financial tool to increase business stability.
Looking for help demystifying factoring rates? We can help. Prairie Business Credit is a national working capital provider to young, growing, or recovering businesses. We offer accounts receivable financing, purchase order financing, and equipment financing. Our company serves both as a trusted financial resource and consultant to entrepreneurs dedicated to building their businesses and ensuring their success.
Maintaining a healthy cash flow in a business is a complex juggling act, even for successful companies. Navigating the constant ebb and flow of income and expenses requires steering through threats to financial stability, like late payments, inaccurate invoices, and even customer disputes. In this article, we share some of the most common accounts receivable challenges business owners face along with strategies to overcome them. When you do, you will optimize your accounts receivable challenges and improve your business’s cash flow management.
The role of accounts receivable in ensuring business stability
Let’s first look at why accounts receivable plays such a crucial role in maintaining a healthy cash flow in your business. Accounts receivable refers to the outstanding amounts owed to a business by customers or clients for the goods sold or services rendered on credit. In other words, it’s the money that you are owed but expect to receive in the future for what you have sold or done.
Effective management of accounts receivable is a matter of timing. With prompt payment from customers, you have access to the cash to cover expenses and fund day-to-day operations in your business as well as reinvest and grow.
Four common challenges in accounts receivable
Common challenges to accounts receivable can include:
Invoices for goods extended on credit or services rendered will include payment terms, such as “due upon receipt” or “Net 30.” These payment terms are intended to set a due date that helps to maintain cash flow in your business.
Late-paying customers, though, can throw a wrench in your careful cash flow planning. To avoid late payments, it is important to set clear payment terms with new customers and to promptly follow up on any late payments, especially if they represent a significant sum.
Inaccurate or incomplete invoices
Invoice errors or missing information can cause problems (and even disputes) in payment processing. Inaccurate invoices can cause your customers to question the validity of charges. Missing details, including itemized descriptions, prices, quantities, and payment terms can delay processing—as well as strain customer relationships.
To avoid these problems, create accurate and detailed invoices that are easy for your customers to understand. Verify the customer’s name, company, billing address, and contact information. Provide a detailed itemization including each product or service, along with description, quantity, unit price, and any applicable discounts or taxes. Clearly indicate the total amount due—and the payment due date.
Inefficient collections processes
Without a structured collections process, it is difficult to track outstanding invoices and ensure timely payment. Missed or delayed follow-up can prolong payment cycles and burn valuable staff time in addition to hamper cash flow.
To stay on top of collections, establish a consistent schedule for sending invoices and reminders to customers that have missed their due dates. Automating reminders via your accounting software or CRM tools can help to streamline collections communication.
Disputes and nonpayment
Sometimes, customers dispute charges or refuse to pay. Customer disputes can stem from misunderstandings, incorrect invoices, or dissatisfaction, while nonpayment can result from financial difficulties or even avoidance. Whatever the reason, disputes and nonpayment can be a direct threat to a business’s financial stability.
Establishing clear lines of communication, especially in fraught customer situations, is key. Keep detailed records of any customer interactions, including email and phone conversations. Many companies create escalation and dispute resolution processes that may include mediation and collections, as well as flexible or renegotiated payment terms.
Strategies for addressing accounts receivable challenges
To reduce or eliminate common accounts receivable challenges, start by assessing your current processes. Implement streamlined invoicing processes and offer convenient payment options, including online and automated payments. Provide clear and timely communication and be proactive in addressing customer relationship management when necessary.
Sometimes, though, problems arise, whether from staffing shortages or process shortfalls. When this happens, even successful businesses can face serious cash flow challenges from accounts receivable problems. Consider where and when your business could benefit from outsourcing your accounts receivable management, which can help lower risk—and allow you to gain more control over your cash flow.
Looking to resolve one of these common accounts receivable challenges? We can help. Prairie Business Credit is a national working capital provider to young, growing, or recovering businesses. We offer accounts receivable financing, purchase order financing, and equipment financing. Our company serves both as a trusted financial resource and consultant to entrepreneurs dedicated to building their businesses and ensuring their success.
You’re on the hook for inventory and materials, but your invoices are still outstanding. And your business has to make payroll next week, and rent is due the week after. Then an order comes in, the biggest one you’ve landed yet—and all of a sudden, you’re wondering if your business can fulfill it. What do you do?
Purchase order financing can be the answer you’re looking for to keep things running smoothly. Through purchase order financing, you can secure the cash to fulfill your commitments and pay for inventory and supplies, all before you ever receive payment from a customer. This article will explain what purchase order financing is and how your business can benefit from it.
What is purchase order financing?
Purchase order financing is a type of short-term financing that can help your business pay for the inventory, materials, or services to fulfill incoming customer orders. Purchase order financing can help your business land sales or new accounts that you might not otherwise have the funding to service. Purchase order financing can benefit new businesses as well as established companies that are rapidly growing or facing a working capital shortage for any number of reasons.
How does purchase order financing work?
There are four parties in purchase order financing: the financing company, the client, the supplier, and the customer. Here is how the parties work together in traditional purchase order financing agreements:
When to use purchase order financing
Wondering whether to use purchase order financing? Common scenarios in which many business owners opt to use this financing option include:
Qualifying for purchase order financing
The purchase order financing approval process is often fast, with approval in days to up to two weeks. It depends on how quickly purchase order details can be provided and confirmed and is contingent upon meeting other requirements of the lender.
In general, you will need to provide the lender information about your business, the customers involved, and your company’s financial history. In addition, approval for purchase order financing may hinge on how much of a credit risk your customers pose, not your business. Lenders will also consider profit margin as well as your business history in deciding to extend purchase order financing. Purchase order financing can be an option for newer businesses and those rebuilding credit, making it an option when traditional bank financing is not available or not enough.
There are key advantages of purchase order financing that any business owner pursuing it should consider. These include:
Regarding the cost, purchase order financing rates can vary depending on suppliers’ costs and payment terms.
Interested in exploring purchase order financing? We can help. Prairie Business Credit is a national working capital provider to young, growing, or recovering businesses. We offer accounts receivable financing, purchase order financing, and equipment financing. Our company serves both as a trusted financial resource and consultant to entrepreneurs dedicated to building their businesses and ensuring their success.
Thirty years ago this month, Trevor Morgan founded Prairie Business Credit to provide working capital to worthy businesses unable to borrow from banks. In the three decades since, Prairie Business Credit has helped nearly 70% of its clients progress to bank or self-financing. To mark the 30th anniversary, we sat down with Trevor to learn more about why he founded Prairie Business Credit, his experience running a small business while lending to small businesses, and why he can empathize with the joy and struggle of being an entrepreneur.
The founding story
Growing up, Trevor got to see firsthand the life of an entrepreneur. “My father was in business for himself, almost accidentally – but he enjoyed it. He had a different and better idea on how to run a grocery business.”
After serving in the Navy, Trevor earned a bachelor’s in business from Bowling Green State University and a master’s in banking and finance from Northwestern before going into banking. His early roles in Milwaukee focused on asset-based lending and commercial finance. The next years found Trevor steadily ascending the career ladder, with leadership roles in Chicago and, as he recalls, a nice corner office. But he bristled at how some in the banking industry looked at entrepreneurs applying for loans. In the decision process, he saw an opportunity to genuinely connect with and help business owners. Ultimately, he says, “There was no way around it without running my own lending business. I got tired of hearing myself complain about how things were done and realized it was time to work for myself.”
Like it is for most founders, going from the corporate world to running his own business was a bit of a shock. “I instantly understood what the struggles were, because no matter how good you are at a particular part of a business, you can’t assume that you’re good at it all. But you’ll have to learn how to do it.” Trevor remembers having to teach himself to turn on a computer, and then learning to write the business’s operating software, as there was nothing available at the time for a small, PC-based factoring company. “It’s enormously humbling, because you end up realizing just how little you know.”
A unique insight into financing
What Trevor did know well from his banking and turnaround experience was how to structure specific types of deals, and how people pay their invoices. “Now I can see that it took the first 10 to 15 years of being in business to start to understand the limits of what I knew and where I could make a difference. Those insights informed how I really wanted to go about my business and where I really wanted Prairie Business Credit to focus.”
Trevor focused Prairie Business Credit’s lending in two categories: service to bankers and lending for growing businesses with solid potential. “I discovered that Prairie Business Credit could be helpful in guiding bankers with troubled deals in ‘softening the landing’ for businesses, because we know how to manage invoices and handle the cash. That can make all the difference,” he says while reflecting on the first category. “In the other side of the business, we work with entrepreneurs with a good idea and business model who need investment to grow, but they aren’t going to qualify for bank financing, and they are too small for traditional venture capital. We take them on when we know they will be successful, and factoring is a great vehicle to do this.”
Helping business owners achieve success
Trevor’s experience running a small business has instilled empathy for what every entrepreneur goes through. “I get to see it from the side that most businesses never do, because I’ve been both the borrower and the lender. When you own your own business, every decision you make is yours.”
In 2003, his son Dylan joined the business, making Prairie Business Credit a family-run business. This helps Prairie Business Credit connect with the entrepreneurial clients they lend to, which are often family-run businesses.
Trevor, Dylan, and the team have been able to help a remarkable number of those businesses achieve success. “We have graduated 70% of our clients to bank financing or self-funding,” Trevor points out. “Nothing is more exciting than being successful. We love hearing our clients’ stories and figuring out how we can help them get where they want to go.”
Trevor reflects on how invoice factoring has changed over the last 30 years and on Prairie Business Credit’s commitment to continuous improvement. “When I started the business, it was called ‘hospice lending.’ I have loved doing the work, figuring out how to cut the losses and help other entrepreneurs succeed. We always aspire to be the people you want to call first.”
Today, Prairie Business Credit is a national working capital provider to young, growing, or recovering businesses. We offer accounts receivable financing, purchase order financing, and equipment financing. Our company serves both as a trusted financial resource and consultant to entrepreneurs dedicated to building their businesses and ensuring their success. Learn more at https://www.prairiebiz.com.
Sometimes even the most well-managed small businesses have financial trouble. Reasons why can vary from unexpected circumstances and economic downturns to poor financial management, but the outcome is often the same: bankruptcy.
Bankruptcy does not always spell the end for a business, especially if it is a viable business with a viable future. Instead, bankruptcy filing can allow the business to reorganize its finances under bankruptcy protection. The business can continue to operate and emerge from bankruptcy financially stronger.
Ensuring continued access to working capital, though, can be challenging for businesses in bankruptcy. Obtaining traditional financing is often not possible, especially for small businesses facing stress. Without financing, businesses can struggle to fund operations, negotiate favorable terms with vendors, and land new opportunities—all of which can make emerging from bankruptcy more difficult.
There is another option, though: debtor-in-possession financing. This article explores debtor-in-possession financing and how it can be a lifeline for small businesses in bankruptcy.
What is debtor in possession?
In the United States, there are three main types of business bankruptcy filings:
A business might file for Chapter 11 bankruptcy because it is a viable business, but it is unable to repay multiple creditors at once. During Chapter 11 bankruptcy, the company is known as “debtor in possession” (DIP) because it continues to operate as the debtor under court control. The company/debtor retains control of its assets and business operations, subject to court approval under bankruptcy protection.
The goal of debtor in possession is to enable the company to restructure its finances to service its debts to creditors and turn a profit, eventually emerging from bankruptcy financially viable.
Debtor in possession financing
Repaying creditors and turning a profit, though, requires the ability to capture new sales and grow, even during the bankruptcy process. This is where many small businesses meet obstacles, because obtaining financing by traditional means can be difficult if not impossible.
Debtor-in-possession financing can provide much-needed capital for businesses that would not qualify for bank financing. Debtor-in-possession financing is often secured by the assets of the business—and like any financing obtained during bankruptcy, would be subject to approval by the bankruptcy court.
According to data from the United States Courts, more than 13,000 small businesses filed for bankruptcy in 2022. These small businesses are facing a particularly fraught path to obtaining financing, as small business lending approvals at banks and credit unions continue to decline. According to recent data, recent instability in the banking system and rising capital costs are contributing to the declining approvals. And the smaller the business, the more difficult it is to obtain bank financing, especially when a business has filed for bankruptcy. Other tools businesses rely on for cash flow relief, such as extended payment terms from vendors, may also not be available while operating in bankruptcy.
These businesses, though, do have another path to financing: invoice factoring, which can be used for debtor in possession financing. Invoice factoring is a financing method in which a business converts its unpaid invoices into immediate cash by working with a factoring company.
Invoice factoring can give businesses working to emerge from bankruptcy access to the capital they need to continue to operate as well as to secure new business. Invoice factoring can help these firms:
Interested in exploring debtor-in-possession financing? We can help. Prairie Business Credit is a national working capital provider to young, growing, or recovering businesses. We offer accounts receivable financing, purchase order financing, and equipment financing. Our company serves both as a trusted financial resource and consultant to entrepreneurs dedicated to building their businesses and ensuring their success.
Maybe it’s because a large order came in. Maybe your biggest customers are late on their invoices. Maybe it’s growing fast, but your business hasn’t quite cleared the bar for bank financing. Whatever the reason, you’re feeling the squeeze and could use an influx of cash, but you’re not sure about your financing options.
If so, it’s time to take a closer look at invoice factoring—and to debunk common myths about this financing option.
What is Invoice Factoring?
Invoice factoring is a financing method in which a business sells its accounts receivable to a factoring company. The factoring company provides an immediate cash advance, then collects on these unpaid invoices from the business’s customers—and finally pays the business the balance of the invoice minus a service fee.
Invoice factoring can benefit businesses of any size, at any stage of maturity, from start-up to established companies seeking an alternative to bank financing. Misperceptions about invoice factoring are common, though, so let’s break them down.
Myth #1: Invoice factoring is only for companies in trouble.
Unfortunately, many business owners either don’t understand invoice factoring or see it as a sign their business is failing. Yes, invoice factoring can be an option when a business is rebuilding credit or facing difficulties, but it’s not the only condition under which a business might factor its invoices. New companies may not yet qualify for bank financing, given the rigors of the process, but can access working capital through factoring invoices. Established businesses can also benefit from an injection of working capital to cover a temporary cash crunch, land a new business opportunity, or make an acquisition while fulfilling payroll and vendor commitments.
Myth #2: Traditional financing is better.
Mostly true. Bank financing and lines of credit are certainly the mainstay for many businesses, but they aren’t the only option. Sometimes they aren’t even an option, or if they are, they don’t provide enough funding for your growth. Financing options outside the bank that can help your business meet its commitments and grow deserve consideration, whether your company is new, facing challenges, or simply in need of immediate access to working capital.
Myth #3: You'll give up control of your company.
Many owners are reluctant to give up any control over their decisions and operations, and this is understandable. A factoring company may decline to purchase invoices of customers representing a credit risk, but for many businesses, it’s the exception and not the rule. Business owners risk ceding much more control by taking on investors for an injection of capital.
Myth #4: Invoice factoring is more expensive than traditional financing.
Yes, sometimes. Funding from invoice factoring, though, gives you much greater financial leverage—and fast access to working capital when you need it. Factoring fees almost always are more than interest on a line of credit, but if factoring allows you to grow faster and take on more sales, the additional profits should exceed the additional costs.
Myth #5: Fees are due up front.
If this were true, it would defeat the purpose of invoice factoring, which is to give you immediate access to working capital for your business. Most factoring companies advance a percentage when purchasing your accounts receivable, with the balance paid to you when the company collects on them, less a fee. This gives you access to cash when you need it most.
Myth #6: Invoice factoring takes too long.
Applying for bank financing can be a lengthy process—and many business owners assume the same about invoice factoring. The reality is that the approval process for invoice factoring is built for speed. Factoring companies understand that their clients are looking for immediate cash. It’s why screening and approval are designed to get you funding as quickly as possible, often within five days, and sometimes faster.
Myth #7: You must factor all your invoices.
Business owners might assume that they have to turn every one of their accounts receivable over during factoring, but this isn’t the case. Some invoices may be better candidates for factoring than others, as determined by size, days outstanding, and other variables. Factoring can be a one-time financing option or provide ongoing access to capital. Many companies also eventually transition from invoice factoring to traditional bank financing.
Myth #8: Invoice factoring will damage my company's reputation.
Many business owners are the face of their business, and they might fear the fallout if it appears that another entity is collecting on their behalf. Today, with the rise of third-party vendors that perform treasury management services for businesses, it’s likely to not even raise an eyebrow. In fact, a business’s customers may appreciate streamlined billing and flexible payment terms offered through invoice factoring with the right company.
Considering the benefits of factoring your invoices? We can help. Prairie Business Credit is a national working capital provider to young, growing, or recovering businesses. We offer accounts receivable financing, purchase order financing, and equipment financing. Our company serves both as a trusted financial resource and consultant to entrepreneurs dedicated to building their businesses and ensuring their success.
April is Financial Literacy Month in the United States—and it provides an excellent opportunity to review and improve your business finances. First observed in April 2004, Financial Literacy Month is intended to educate people on the principles of finance and planning for a secure financial future. It’s a topic as important for businesses as it is for individuals.
Top financial challenges for businesses
Businesses face many financial challenges, from getting started and attaining profitability to navigating the financial demands of various growth phases. According to data from the US Census Bureau, there were over 32.6 million small businesses as of 2018 (the most recent data), and 99.7% of them have 500 or fewer employees. Small businesses power the United States economy, but they face particular financial challenges. Staying in business is one of the biggest: although 80% of small businesses make it through Year 1, nearly half are out of business by the end of Year Five, according to the US Chamber of Commerce.
Why? For nearly half, it’s lack of funds—difficulty accessing the working capital needed to meet short-term liabilities and operational expenses, to keep the lights on, people on staff, and the business running. Limited or insufficient cash flow leads to many other financial problems, including missed business opportunities, too much debt, failure to raise capital, poor marketing, missed or late bill payments, and the mixing of personal and business finances.
Businesses need access to working capital. Without it, they risk their business growth—and sometimes the business itself. But it’s not always easy to obtain working capital, especially for small, young, or rapidly growing businesses. Traditional lending like bank financing—loans and lines of credit—often have requirements that young or new businesses cannot meet. Or, their terms and repayment schedules make it difficult for small businesses to meet them and remain profitable and growing. Other options may not be better, putting small or young businesses at risk of predatory lenders or at the mercy of venture capital investors who take an equity stake in a growing business.
Business owners can benefit from thinking outside the bank for their working capital financing during Financial Literacy Month and at any time all year. Here is what business owners should know about an often-overlooked financing option: factoring.
What is factoring?
Factoring, also known as invoice factoring, is a financing method based on the purchasing of accounts receivable. A factoring company purchases the unpaid invoices of a business for services already rendered or products already purchased. The factoring company advances funds to the business and then follows up with the customer for payment. When payment is made, the factoring company then pays the business the balance of the invoice less a fee.
Who benefits from factoring?
Businesses of any size can benefit from factoring when they need access to cash but do not qualify for bank financing. These include situations in which a business has been turned down for bank financing. These reasons can be customer concentration, credit score concerns, insufficient assets or net worth, or being a start-up or new company without a long enough track record to satisfy the bank’s lending requirements.
Factoring is an option when delayed invoice payment, a large order, or other unexpected circumstances constrain a business’s access to working capital—at any stage, and for businesses of any size. Established businesses may face challenges when they land new accounts and must fund the rapid growth that can come with large new orders. Factoring can also benefit businesses recovering from a financial setback, helping them regain profitability. In addition, businesses can also realize benefits from factoring by outsourcing management of accounts receivable to a professional factoring company. This can relieve pressure on staff or reduce accounting errors that may delay payment, ultimately helping a business get paid more quickly and be more efficient overall.
When should I factor my invoices?
Put simply, factor your invoices when the gross margin on the next sale is greater than the cost of factoring, or when your business will save money with trade discounts, reduced administrative costs and collection fees that offset the cost of factoring. Another smart reason to factor is when landing new business—and funding it—through factoring will increase your bottom line.
How much does factoring cost?
The fee varies by the amount of time it takes to collect the receivables. Typically, the fee ranges from 2-5% of the invoice’s face value. Some factoring companies (like Prairie Business Credit) will only collect the fee when you receive your payment.
Does factoring affect my credit rating?
Factoring invoices gives businesses access to cash to pay bills, pay down debts, meet operational expenditures, and make investments in growth. This can help businesses improve their credit ratings and take advantage of discounts and better terms from suppliers. Ultimately, these actions can help to accelerate a business’s ability to obtain bank financing in the future.
Looking to protect and grow your business with access to working capital? We can help. Prairie Business Credit is a national working capital provider to young, growing, or recovering businesses. We offer accounts receivable financing, purchase order financing, and equipment financing. Our company serves both as a trusted financial resource and consultant to entrepreneurs dedicated to building their businesses and ensuring their success.
Everyone has heard the saying, “It takes money to make money.” Business owners know this is true. It takes physical resources like space, materials, and components to produce your products, not to mention the costs of skilled labor, expertise, and administrative support. Moreover, growing a business can require additional working capital, but a young business does not always have easy access to the funds it needs.
What is working capital?
Working capital is the money available to meet your business’s immediate and short-term operational expenses—things like payroll, supplier payments, administrative expenses, rent, utilities, and more. It’s calculated by taking current assets and subtracting current liabilities.
A shortage in working capital can be a real problem for a business, preventing it from meeting urgent short-term operational expenses. Young, growing businesses face specific working capital shortages—often, they have not been able to secure enough working capital to support the business during its early stages, or during stages of rapid growth. Without enough working capital, a business may miss out on key opportunities. Perhaps there are insufficient funds to invest in new product for a large order, restock inventory, or take advantage of discounted payment terms from suppliers. A working capital shortage can also have worse consequences, like late payments to suppliers or creditors, which can damage credit ratings or even a business’s reputation. It is why business owners are often under pressure to ensure access to working capital.
How much working capital does your business need?
The answer to this will vary depending on your business, what you sell, and your growth phase. Typically, startup and young businesses should ideally have six to twelve months of operating expenses on hand to meet the short-term needs of this cash-hungry stage. This is because growing businesses face significant investment in staff, certifications or filings, inventory, and other related costs simply to get up and running. More established businesses may find that three to six months’ worth of expenses is enough to handle seasonal fluctuations or slower periods in business.
The problem is that the repayment or financing terms of certain working capital options may put a strain on young businesses during this period of rapid growth. If repayment is due before your business is able to generate increased cash, you will remain in a working capital pinch.
Many business owners turn to lending options to raise working capital or address a working capital crunch. Here are a few of the most common sources for working capital for young businesses.
Working capital options for businesses
There is another option that can provide working capital for young businesses: factoring. Also known as invoice factoring, it is a financing method that can provide fast access to working capital. Businesses sell their unpaid accounts receivable to a factoring company. The factoring company pays an advance and then collects payment on the invoice, paying your business the balance minus a fee. Factoring can solve short-term cash flow crunches, even for start-up or young businesses, or those that face long odds with bank financing because of credit ratings or credit risks.
Looking for the best working capital options for young businesses? We can help. Prairie Business Credit is a national working capital provider to young, growing, or recovering businesses. We offer accounts receivable financing, purchase order financing, and equipment financing. Our company serves both as a trusted financial resource and consultant to entrepreneurs dedicated to building their businesses and ensuring their success.
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The Cash Gap
Our Second Client Defrauded Us - How it Changed the Way We Do Business
Is Prairie Business Credit Expensive? How Much Do They Charge?
Top Ten Reasons to Factor
You Need Cash for Growth
Who are Good Candidates for Factoring?
Our Number One Goal is that Our Clients Leave Us
A Bridge to Where?
In the Age of the Internet, We Still Do Business Face to Face
Two Fundamental Principles When Giving Your Customers Payment Terms
Team Up with a Factor To Earn Lifelong Business Customers
Make No Little Plans
Prairie Business Credit Promotes Morgan
Prairie Business Credit Promotes Diversey