Businesses generally generate cash by selling goods and services. However, when you are a small business, you may need a more steady cash flow than your customers can provide. Customers often buy goods and services on credit, and it takes them some time to pay their bills. There are other ways to use these receivables to generate cash if a business is in need of a short term cash solution. Below are three common high risk cash advance options used to turn receivables into cash flow.
Line of Credit. Banks, merchants, and other financial institutions often offer businesses a line of credit based on their receivables. The amount of credit is based on historical receivables, so this may not be the best option for newly developed small businesses. However, the loan is generally easy to maintain once the business gets it. The business can usually pay back the line of credit as it wants, and the interest rates are fairly low. Some banks or financial institutions will require that the receivable payments to pay back the loan, and the payments are processed through them. It will generally take between 30 and 45 days to get this line of credit set up, so it may not be the best solution if you are looking for a quick turnaround.
Factoring (Accounts Receivable Financing). This option is very similar to the line of credit, but it is based on outstanding invoices that are less than 90 days old. Generally, the maximum that the lending institution will advance is 90% of the total amount of the receivables. The person’s individual credit score is not a factor with type of arrangement, and the turnaround time for approval is very quick, usually within one week. However, the business will have to notify its customers that their receivables have been assigned to someone else, and for some wary customers, that could signify that your business is having financial problems.
Asset Based Loan. An asset based loan is based the average 90 day receivables balance. The interest rates may be higher on this option, but credit may not be a factor for this type of financing. However, the maximum amount is generally only 65% to 80% of the total average receivables. It usually takes about 10 to 14 days to get approved for an asset based loan. This one also has a minimum draw down amount, and the business will get charged fees based on the drawn down amount, even if they did not actually draw down those funds.
Most of these options are available through a bank or other financial institution, but if the business owner has poor credit, they may not be an option. A high risk cash advance might be the best way to go. Check with First American Merchant to find out more about similar options if your business is short on cash flow but long on receivables.
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