One of the most difficult challenges any business has to contend with is receiving its payments. Outstanding accounts can cause serious complications in revenue flow for any operating business. Unpaid accounts add up to a mounting deficit that can seriously affect a business’ own credit situation and create difficulties in paying its own outstanding loans. This is where certain helpful business finance tips point the way to solving these potentially critical problems.
The Accounts Receivable Picture
A basic understanding of how a business stays afloat is to imagine water flowing into a sink. An open drain represents the debts and outstanding accounts sucking away operating capital and credit. The open faucet is the revenue stream, the money that business makes in the course of its normal operations. In much the same way as opening the tap further allows more water into the sink faster than it drains out, receiving payments on outstanding accounts brings in more revenue than is removed by outgoing payments. This is a crude analogy for the concept of accounts receivable.
Opening The Money Tap
So, what happens if the business cannot get that tap opened, or rather, to get outstanding accounts to pay on time? Under normal circumstances, this results in a mounting negative revenue situation. Operating capital dries up, credit becomes more difficult to obtain, and loan holders put increasing pressure on the business to pay or declare bankruptcy. Loans for refinancing have been the traditional method for temporarily solving this problem, but the aforementioned credit problems can cause difficulties in refinancing. This is where business factoring can help open that tap and get money flowing back into the coffers.
How Does Business Factoring Work, Then?
Business factoring is a way to sell outstanding invoices to a service for immediate cash. This service purchases the outstanding debtor account invoices, exchanging them for cash within a 48-hour timeframe. The Factoring Service then takes on the burden of collecting the outstanding debt, leaving the business free to use the new injection of cash as it needs. In short, it takes dead paper and turns it into liquid assets, allowing the business to again meet its own obligations and finance operations. It is the best way to immediately solve a cash flow issue and return to the path of profitability easily without diluting its own equity or adding additional debt.