Comparing cash flow options for your business

Whether you have cash flow issues or just want a way to increase your cash flow, comparing your financial options can help you make the best decision.

Common causes of cash flow problems

• Long Payment Terms: In the maintenance industry, payment terms are typically 30-60 days but can takes as long as 90 days, leaving smaller companies struggling to pay overhead and operating expenses on time.

• Overhead Expenses: Dispatch, accounts payable, accounts receivable, payroll, benefits, back-office tasks, all add up.

• General Operating Expenses: Costs can be unexpected and expensive, leaving companies to come up with money swiftly. Then there are planned expenses like refrigerant, technician and employee pay, insurance premiums and more.

• Taxes: You will have annual taxes. If your tax bill is larger than anticipated, you may use all of your cash reserves and then some.

Invoice Factoring

Factoring is when a factoring company purchases your open invoices. You usually receive payments for those invoices within 24 hours. The factoring company then communicates and collects payment on those invoices from your customers. Factoring fees are determined as a percentage of an invoice value – usually between 1.5% - 3% for each receivable.

The main reason a company chooses to factor is to get paid on their invoices quickly, rather than the 30, 60 or sometimes 90 days it often takes a customer to pay. How much a company factors will depend on their unique business needs. Some companies factor all their open invoices, while other factor only invoices for customers that traditionally take longer to pay. With factoring, companies get the increased cash flow they need to pay employees, manage purchase orders, take on new business and more.

Asset-Based Lending (Bank Loan)

Asset-based lending is a loan or a revolving line of credit that is secured using a company’s assets as collateral. Like Factoring, asset-based lending can use receivables as collateral, but it can also extend to other assets like equipment, real estate, inventory, and raw materials. Asset-based loans are priced an annual percentage rate (APR) ranging between 7% - 15%.

The amount of money a company can borrow through asset-based lending depends on the value of the assets that are offered as collateral. Asset-based loans provide a loan-to value ratio (LTV), which can be between 75% and 90% for receivables, but often 50% or less on other collateral. If the value of your company’s asset changes, that will affect how much money you are able to borrow through an asset-based loan.

How do bank loans compare to invoice factoring?

The approval process for factoring generally involves reviewing the credit ratings of your company and your customers, which usually takes a few days. To qualify for an asset-based loan, however, the value of the assets that will be used as collateral need to be verified. This can take the lender several days or even weeks. Because SameDayPay.io is a financial representative for your customers, it will take only seconds to complete your sign-up.

Asset-based lending is typically more discreet. Before you enter into a factoring agreement, the factor must contact your customer to verify their accounts with your company. The factor will remain in contact with your customers since it will be handling collections on the invoices. There is usually little interaction between a bank and your customers, as the bank is utilizing your assets and account receivable as collateral.

Factoring is a sales transaction, not a loan. There are no required monthly payments to a lender. The factoring of invoices takes place with each sales transaction, which means that funding from Invoice Factoring can “scale up” with your company’s growth as your receivables increase.

Merchant Cash Advance (MCA)

A merchant cash advance is a financial service where an MCA provider offers a cash advance based on your future sales. You pay back the advance plus interest in installments from an agreed-upon percentage of your daily credit card sales. Oftentimes, it is between 10-20%. This means the daily dollar amount that is debited directly to the MCA provider will vary, depending on the total amount of your credit card receipts on a given day. Interest rates for MCAs are typically high so you may end up paying as much as 20-40% more than the amount advanced.

Merchant cash advances are utilized by companies that have a lot of credit card sales, making it easier for small businesses with bad credit history to quality for a MCA.

How do merchant cash advances compare to invoice factoring?

Invoice factoring provides access to cash that has already been earned. A factor typically only purchases invoices for your customers that have a good credit rating, because SameDayPay.io is the financial representative of your customers, they will purchase invoices from you based on proof of work complete. Once SameDayPay.io purchases an invoice, your risk of customer nonpayment is totally erased.

A merchant advance is funded from future sales. Once your application is approved, you will receive payment typically within 48 hours. With no collateral and no personal guarantee required, the risk to the lender is high. This mean the interest rates and fees will be high. The MCA provider gets paid a daily percentage of your sales through direct access to bank account, until the loan plus interest is paid in full. Penalties from MCA lenders for nonpayment are hash and can often cause additional financial hardship.