Many businesses have cash flow challenges and could significantly improve their operations if they could improve their access to cash. In its simplest form, positive cash flow is a basic equation:
Incoming cash – Outgoing cash = Cash flow
If your cash is not coming in faster than it’s going out, you have negative cash flow. Cash flow is not only a function of the amount you collect but also how fast you can collect funds due to you. The faster you get paid for your services, the better your cash flow.
There are a couple of ways to help get your cash to come in quicker. One is merchant cash advance (MCA), the other is accounts receivable financing (factoring). Both provide you with fairly quick cash, but there are distinct and significant differences between the two options.
Merchant cash advances (MCA) are typically advances on your estimated cash collections and credit card income, paid to you in a lump sum. The advance amount is typically based on your business’ monthly sales volume and repayment is drafted daily or weekly either from your bank account or from your credit card processing account. MCAs are not traditional loans, and the approval process can be very quick and require very little in documentation and credit review. They come with very high interest rates ranging from 60% - 150% that are often impossible to calculate, mid-range contract terms, automatic renewals, and can be difficult to move awar from once started. While the influx of cash is quick, the long-term effects can be quite expensive and punishing as there is a significant daily drain on your cash which will eventually catch up to you.
Oftentimes, a company will take an MCA loan to alleviate theircash flow but will need to take another in a short period of time to continue making payments on the first MCA loan. This begins a downward spiral ofstacking multiple high interest rate MCA loans that are near impossible to digout of. The MCA loan is a short term injection of cash but ultimately saps thecash-flow out of the company in the long term.
Accounts receivable financing, also known as factoring, involves the sale of your accounts receivable (invoices) to a third-party. The factoring company pays you a percentage of the amount you invoice upfront and then collects the money owed on those invoices, paying you the residual amount less fees. The typical relationship is ongoing (12 months or more) and as long as you continue to sell your invoices to the factoring company, you will continue to receive upfront cash on a continual and predictable basis.
With factoring you receive payment on your invoices faster than if you wait for your customers to pay you directly. Many customers pay invoices in 30, 60 or even 90 days from the date of the invoice, adversely impacting your cash flow. When you factor your receivables, you may receive an advance in as little as 24 hours after you submit the invoice. With factoring, you are funded on a regular basis as you sell your ongoing invoices to the factoring company and because you are selling your invoices yourcustomers payments repay the advance. Your bank account is not being drafted daily or weekly for payments as would be the case with MCA. Also, your interest is aligned with a factoring company as it is in everyone’s best interest to collect the invoice as soon as possible, something the MCA lender does not care about.
As you review financing possibilities, take a look at how your business operates. If you are doing work for other businesses, and creating and sending invoices, accounts receivable financing may be your best short and long-term solution for increasing your cash flow.
Contact us today and let the professionals at Commercial Funding help you evaluate your options.