What To Do When a Traditional Line of Credit Isn’t an Option: The First 4 Things You Should Know
Maintaining cash flow is essential for any business to meet your financial obligations. But rapid growth, new opportunities, slow-paying clients and any number of other factors can create a need for quick access to working capital. If your company needs to generate cash flow but have had the tough conversation with your bank that you do not qualify for a traditional line of credit (“LOC”), what’s next?
What kind of financing is available for companies that don’t have a traditional LOC? What other information should you know when considering your options?
Purchase order (PO) financing and invoice factoring (receivables financing or factoring) are two of the most common funding options for businesses in need of alternative financing. But which option is right for you?
Purchase order financing
PO financing is ideal for distributors of goods, importers and wholesalers who receive a purchase order from another businesses but needs capital to pay the supplier or manufacturer for those goods at the time of shipment. PO financing provides the funding to pay for the product to be manufactured and/or shipped and delivered to your customer. Once the goods have been delivered, the finance company will be reimbursed, plus a small service fee.
Accounts receivable financing
Also known as invoice factoring, accounts receivable financing is a debt-free way to accelerate cash flow based on the credit of your customers, rather than your own. It is used after services are provided and goods delivered. Funding is provided based on invoices submitted to the customer. The factor pays a percentage of the invoice amount (around 85 percent), often on the same day and is then paid by the customer in 30, 60 or 90 days. Once the invoice is paid in full, you will receive the remaining amount, less a small funding fee.
If you are considering alternative funding options, here are the first four things you should know.
- Type of financing. Determine if you need PO financing, invoice factoring or both. The key differentiator is the timing of the funding. PO financing provides funding on the front end of the transaction with your customer, while invoice factoring is provided once the product has been delivered to the customer at the time of invoicing and provides working capital while you await payment on the invoice
- Frequency of funding. Are you looking to fulfil a one-time need or an ongoing need for working capital? If you only need financing to cover a few orders, this is called “spot” financing. Spot financing is only provided by a handful of financing companies and is generally much more costly. Most financiers, including Allied Affiliated Funding, are set up to provide an ongoing source of working capital.
- Amount of funding needed. How much do you need in PO financing and/or invoice factoring? For PO financing, estimate the amount needed based on your cost to your manufacturer or supplier. For Invoice financing, consider how much you plan on invoicing your customer monthly and then how long they are going to take to pay. For example, if you are invoicing them $150,000 monthly and they pay in 60 days, you need at least $300,000 in invoice funding.
- Cost of financing. The cost of PO financing is typically higher than invoice factoring because the risk associated with financing goods not yet delivered is elevated. Most PO financiers expect repayment at the time of product delivery to the customer. They are often paid off by a receivables financing company when the invoice is funded. Some PO financiers require they be paid off by a receivables financing firm while others give you the option to repay them directly, without invoice financing. Determine if you will have the money to pay your PO financier at the time of invoicing. If not, you may need a receivables financier as well.
As a division of Axiom Bank, NA, Allied offers a variety of funding solutions for your business. In addition to invoice factoring, we offer additional supplemental financing products that can be coupled with our factoring and asset-based lending services. Are you in need of working capital to meet your financial obligations? Contact us today to learn more.