With the tightening of business credit, companies are struggling to make ends meet amid a backdrop of uncertainty. Companies are taking longer to pay invoices and the effects are reverberating throughout the global economy. Banks raise interest rates and businesses are left to deal with the consequences. However, there are credit alternatives that allow companies to assume a more hands-on approach to financing their business. They include asset-based lending practices and the most common ABL financing vehicles are purchase order financing, and accounts receivables factoring. Both options empower businesses to take charge of their capital requirements and are a much more viable financing option when compared to the exorbitant interest rates on business credit lines and bank loans.
Purchase Order Financing
The principle behind purchase order financing is to provide businesses with the working capital to purchase the raw materials and parts to complete existing customer purchase orders. Companies can use the value of their order as a form of collateral in order to secure the working capital so vital to their business needs. Financing companies will essentially purchase the order itself, provide the company with the necessary funds, and then proceed to collect on the invoice. The benefit is access to immediate funds and the flexibility of better cash flow management. In addition, purchase order financing allows companies to pursue any business opportunity, regardless of its scope.
Accounts Receivable Factoring
Receivables factoring includes taking an open customer invoice and using it to secure financing. In this case, the decision to lend money is based on the age of the invoice and the credit worthiness of the customer. There are no credit checks on the company and no review of any financial statements. The onus is on the customer’s ability to pay the invoice. Companies get immediate working capital, while the financing company collects on the invoice. In a sense, receivables factoring can be viewed as outsourcing accounts receivable collection. Once the customer pays the full amount, the company is reimbursed the difference and the financing company charges a small fee.
Today’s businesses must take charge of their finances. Banks and conventional lending methods are tied into the ups and downs of credit markets and the swings in business cycles. To avert a sudden lack of credit, companies must be proactive in securing their own financing needs.