How Receivables Financing Can Improve Working Capital Management

Regardless of whether businesses have a sufficient volume of funds owed to them by customers to qualify for accounts receivable financing, business borrowers should not ignore the increasing need to replace traditional banks as an ongoing source of small business loans. Receivables factoring is a business financing option that is being reviewed by small business owners as a practical replacement for conventional bank financing. For any business that has substantial accounts receivable, the use of receivables financing is likely to be on the short list of strategies to improve cash flow and obtain working capital quickly.

Acquiring a sufficient understanding to be comfortable with how a new process works in practical terms will always be one of the primary challenges in considering any specialized approach to small business financing. A firm belief that this form of commercial financing was straightforward and simple was among the previous attractions for using a traditional bank business loan. It is likely that in many circumstances a commercial banker persuaded a business owner that receivables factoring should not be used because it would be too costly or complicated. It will come as no surprise to most when they learn that this was often an attempt to portray potential competition in an unfavorable light by banks. In an ironic twist, it has recently become more clear that the typical bank approach was not so simple after all. Because of obscure recall clauses that allow many banks to cancel small business loans with little or no advance notice, many commercial loans made by banks are now being revoked. With very little warning, business lines of credit are also being eliminated or decreased by a large number of banks.

The harsh reality for most small business owners is finding an effective source of working capital financing and other business finance options to replace bank financing that either has already disappeared or can reasonably be expected to within a few months. Whenever possible businesses should first attempt to accomplish this by reducing their overall commercial debt. Commercial borrowers should focus on the most realistic alternatives for raising additional capital to maintain cash flow at an acceptable level when it is not practical to reduce business debt. One strategy for doing this is to explore the viability of securing more equity financing. In exchange for providing capital, this path requires taking on one or more new partners who will then have a piece of the business. These options for reducing debt and increasing equity financing will not be practical for many specific business situations even though they can be very effective solutions in general.

For any small business owner trying to keep their operation afloat, it is at this point that receivables financing must be thoroughly evaluated. A temptation for borrowers to eliminate options prematurely because they appear to be too costly or complicated is one of the biggest hurdles in this process. It will usually be prudent to keep all workable options on the table because in all likelihood there will not always be be a simple or cheap solution to the commercial finance situation for a business. Accounts receivable factoring will often be the only small business financing option that can be realistically arranged for many businesses. While it is true that factoring might be viewed as "Plan B" for a business, it deserves serious consideration when "Plan A" is bank financing that is often not available in the current commercial lending environment.

Stephen Bush is Chief Executive Officer of AEX Commercial Financing Group and is a small business financing expert who helps commercial borrowers in all regions of the United States. Please contact Steve for straightforward and practical business finance options for commercial real estate loans and working capital management. Prior to founding AEX Commercial Financing Group, Steve served as an officer in the U.S. Navy Supply Corps and as a financial investing/real estate investment consultant. He received a BA degree in Business Psychology from Miami University (Oxford, Ohio) and an MBA in Real Estate Finance from the University of California (Los Angeles).