Cash Advance: Getting the Capital for your Small and Mid sized Businesses |
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When your customers take a long time to pay your invoices, your money gets stuck with your customers and your own business suffers due to lack of funds. The cash flow gets adversely affected and you have to turn to other sources of money to keep your business going. One such source is the process of cash advance whereby your commercial accounts receivable (invoices) are purchased at a discount and you get the cash advance as soon as your service and product has been delivered. This rescues you from the delayed payments of your customers and you can proceed with your business activities with a steady cash flow. This system has become very popular nowadays, emerging as a very convenient alternative to other forms of financing and is applicable to all types of products and service-related industries. Cash advance, unlike other traditional forms of financing, is available even if you have just started your business as the factors primarily show at the creditworthiness of your customers, not you. There are two types of cash advance arrangements: recourse or no recourse. In the case of recourse cash advance, if your customer fails to pay the invoices, you will be liable to return any advance that you would have received from the factor. Thus the factor is protected from any collection problems. Factors, normally, find out if any of your customers has a questionable credit rating and if so, they only purchase their invoices under a recourse situation. On the other hand, the risk of collecting money against the invoice lies completely with the factor in the case of non-recourse cash advance, despite that payment against the invoice might be uncollectible. Most business owners, therefore, prefer to enter into non-recourse cash advance arrangements because the factor assumes the credit risk. Before approving cash advance, the factor conducts a thorough research into your customers' credit and any liens placed against your company. For a speedy approval process, it is better to be honest and provide a complete and accurate client profile along with specifics about your company, such as a list of the customers, length of time in business, monthly sales volume, and a description of your operation. The approval process can take up to a week. After the approval, you can negotiate terms and conditions with the factor by considering several aspects of the deal. The terms of the deal will depend on the amount that you want to factor and will basically stipulate the discount schedule as the cost for factoring your invoice. A factor may retain between 2%-10% of the invoice's value as a fee but it is worth paying this amount, keeping in view the cost of lost business or losing your business entirely. After the agreement is reached, the factor confirms the legitimacy of your invoice before buying your receivables and advances the cash advance to you. In most cases, cash advance firms provide immediate cash advance and then assume the role of your collection department, which proves to be very convenient for most businesses. Sometimes, cash advance is also provided on purchase orders before the order is even complete. This helps those who have the orders, but lack the capital needed to fill the orders. Cash advance is helpful to nearly every type of business from promising start-ups to those working through Chapter 11 bankruptcy. Moreover, if cash advance is not the right solution, the factor will suggest a suitable alternative such as a program designed around equipment leasing, government financing, personal investors, or bank loans. Although cash advance fees might be higher than the loan interest charged by a bank, you should weigh the unearned income and lost opportunities due to lack of cash advance flow and the savings that might result. Moreover, cash advance allows you to bring down the expenses on collections and credit checks. Companies simply can't afford not to factor their invoices. |
