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Using Asset-Based Financing for Business Growth

By Trace Reddick, MBA,

Running a small business is tougher than most will ever give you credit for. Sure, there’s the obvious pain points like making sure supply and demand keep up with one another, but an underlying struggle for almost every small business owner is making sure there’s enough cash on hand to grow. Checking the mail and finding a bill or finding out you need to purchase more supplies or inventory can be an unpleasant surprise if your cash on hand is minimal or unpredictable; one wrong purchase or investment could mean additional costs and delays. 

Often, businesses struggle to grow because its owners are unable to qualify for a loan or don’t have the ability to stretch its cash on hand for long enough to invest in growth opportunities without risking it all. What most of these owners aren’t familiar with is their ability to use outstanding invoices as leverage and secure financing through asset-based lending.

Accounts Receivable Financing, also known as Factoring, is similar to a payday loan just for businesses. As with a paycheck, an invoice that has terms to be paid but has not yet been paid can be an opportunity for instant financing. The “Factor” will give you the face value of the invoice minus a small service fee. A reserve may be kept but will be payed back once the invoice is payed by the debtor. Despite the commonality of paycheck loans, very few people know that there are independent companies, like Dorado Finance,  that purchase B2B invoices at a discount. Factoring dramatically helps owners maintain the business with a stable and predictable availability of cash for payroll and other overhead including expenses such as marketing, operational or sales efforts that can be used to sustain and grow the business.

Unlike loans and credit lines, businesses owners can leverage factoring to use the business assets and, most importantly the customers’ credit to secure the funds needed without incurring debt. For instance, say a client owes you $1,000 and has thirty days to pay but you need the money now for your office’s utilities. This is where factoring agencies can help. They’ll buy your client’s invoice for a slight discount, say 5% or $50. Your business will receive $950 immediately, and the factoring agency will collect the full invoice from your client. Whether you have an outstanding bill that needs payment or are looking to put money down on a growth venture, having access to immediate funds can make a significant difference in the growth of your business.

See for yourself: When you compare a factoring line of $100,000 at 4.5% with a $100,000 loan at a 4.5% interest rate, the cost to the business owner is drastically different. A factoring line would cost you $4,500 and you’d have access to the remaining $95,500 without incurring any debt or long-term obligations. With the same size loan paid back over ten years, you’d be paying back a total of around $125,000, costing you an additional $25,000 and incurring an additional monthly expense as you pay back the loan!