When you’re running a business, keeping a steady flow of cash is required to pay the bills, your workers, and otherwise keep the doors open. This can be difficult in hard times – such as the current pandemic – or if your customers are slow in paying their outstanding invoices.
If you’re nearing the end of the month and you’ve got a cashflow shortage, you don’t have a lot of options. For example, bank loans aren’t a good idea. Bank loans are usually for major purchases and investments, not for paying the bills. You’d be unlikely to find a bank interested in talking to you, and unlikely to get a loan at all unless your credit is exceptional – which often isn’t the case for small businesses.
The other option that small businesses often opt for are cash flow loans. These are the ‘payday loans’ of the business world, specifically for paying off smaller debts. But which cash flow loans are best for small businesses? Let’s take a look.
Understanding Cash Flow Loans
Cash flow loans are typically riskier for lenders because they’re lending against the promise of future income, rather than requiring hard assets as collateral. As a result, they typically have high-interest rates – often extremely high, particularly if you go overdue on repayment.
This makes cash flow loans risky for borrowers as well. If you borrow against future income, and the sales don’t happen, you end up in a much worse situation than before.
Fortunately, there’s another type of cash flow “loan” which makes a lot more sense for many small businesses – invoice factoring!
Also called accounts receivable financing, invoice factoring doesn’t rely on future sales that might not happen. Instead, the collateral is your outstanding invoices. In fact, it’s not really a loan at all. Simply put, you sell your outstanding invoices to a factoring company, usually for around 80-90% of their face value. Then that company takes overall responsibility for the invoices and their collection.
So, you lose some money on the transaction, but you get hard cash in hand quickly, and without a loan that needs to be paid back. You might even save money in the long run, since you don’t have to do your collections.
If you’re struggling to pay your small business bills, Camel Financial can help. We’ve been pioneers in invoice factoring since the 1980s! Contact us to learn more.