Factoring client

Newer and smaller businesses are usually more agile than established firms. They’re able to act quickly on opportunities for growth and find ways to better serve their customers. But lack of enough working capital can make it harder for them to respond to opportunities.

You’re probably familiar with the situation. Business is actually going well. Your customer base is growing and you expect more cash to flow into your bank account from the accounts receivable on your books. There’s just one problem: you can’t use invoices to pay for new software that will make productivity jump or to open a new store. Big companies generally have the credit and cash on hand to make improvements and stay ahead of the curve, but what about smaller or newer businesses?

Over a long period, more cash may move into your business than out, but over briefer intervals, cash flow can stall, or temporarily go negative. Having resources for bridging these cash flow gaps or smoothing out “lumpy” cash flow can help your small business.

Many small businesses turn to accounts receivable financing to help keep things running smoothly when there’s a cash flow hiccup. Gaps in positive cash flow can limit a business’s potential for growth, even if cash flow is positive long term. Accounts receivable financing helps business owners manage cash flow better. Here are 5 ways accounts receivable financing helps small businesses.

1. By Injecting “Breathing Room” Into the Small Business Budget

To use accounts receivable financing, a company “sells” outstanding invoices to a company (often called an invoice factoring company). This brings in cash in the form of an advance of typically 80-90% of the value of the invoices (the remainder, minus fees, is paid when the invoice is paid). This accounts receivable advance gives a small company breathing room in the budget for operating when there’s a short-term imbalance in cash flow.

2. By Smoothing Out Lumpy Cash Flow

If a business has a few, big clients; cash flow can be tight and then suddenly spike when a big client pays, but then drop steeply when it has to pay expenses, and spike again when the next invoice is paid.  Many B2B companies use accounts receivable financing to smooth out “lumps” in their cash flow. This is often necessary because when an invoice is payable in 15 to 90 days, most payers opt to wait as long as possible. Long payment cycles can leave you short on cash for things like paying employees or upgrading software. But accounts receivable financing helps you plan more effectively due to better cash flow predictability.

3. By Providing Quick Access to Working Capital

Sometimes opportunities arise unexpectedly, and if cash flow has been slow, you may not have the money on hand to seize these opportunities. But accounts receivable financing lets you access working capital quickly — in a day or two, or even within the same day. That means you’re ready for that outstanding deal on a product, or to purchase a piece of equipment that comes up for sale unexpectedly without worrying about bouncing checks or digging into credit.

4. By Increasing Financial Flexibility

Depending on the type of business, client demand can wax and wane. For example, a small business with a strong seasonal component may deal with a major cash influx during the Christmas season, but slower cash flow at other times. Accounts receivable financing helps companies better manage busy and lean times by making it easier to ramp payroll up or down when necessary. Businesses must be ready for seasonal variations, and accounts receivable management can ensure they are.

5. By Offering Your Employees More Security

When a company can’t manage cash flow, missing payroll is possible, and this can pummel employee morale. Using accounts receivable financing to manage cash flow means more secure employees and ultimately lower turnover. Knowing you can access accounts receivable financing helps you focus more on core business processes and less on worries about fluctuating cash flow.

Bottom Line

Positive cash flow can sometimes be lumpy in the short term, but your outstanding invoices can be used to obtain a cash advance without taking on debt as you would with a business loan. With accounts receivable financing, you’re ready to seize unexpected opportunities, meet payroll, and pay expenses without worrying about your bank account. For this reason, accounts receivable financing can be a tremendous advantage to today’s small business.


This content is for educational purposes only and should not be construed as professional advice of any type, such as financial, legal, tax, or accounting advice. This content does not necessarily state or reflect the views of Bluevine or its partners. Please consult with an expert if you need specific advice for your business. For information about Bluevine products and services, please visit the Bluevine FAQ page.