Emergency Cash: The Pros and Cons of 3 Types of Fast Business Funding

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BFF Manager
29/10
2015
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You need cash and you need it fast. Like yesterday. Every business owner has been there at one time or another. A client takes too long to pay. Some unexpected emergencies pop up. Next thing you know, you’re struggling to pay your vendors, your landlord, or even your employees.

The first thing to do is remain calm. You have options. In some of our other posts, we’ve talked about strategies like negotiating with your vendors, asking your customers to pay early, and even working with your managers to delay some amount of compensation. It’s worth exploring all of those options.

emergency business cash funding

In this piece, though, we’re focusing one thing only: cold, hard cash and the various methods you have for getting it in the door as quickly as possible.

The rise of the digital economy has created a whole new way for most companies to do business. One of the biggest benefits is that you now have access to a wide range of funding sources that businesses didn’t have access to years ago.

There was a time when the search for immediate funding started and ended at your local bank. Now you can find many immediate funding solutions online with just a few clicks. Below, we’re going to discuss three of the most common and popular solutions, and also why those solutions may or may not be right for your business.

Be careful, though. There’s no right solution for every business. You need to do your research before you pull the trigger on any of the following funding options.

Line of Credit

You’re likely familiar with a line of credit. Maybe you even have one. A line of credit can be a great way to get quick cash and then pay it back over as you’re able. However, getting a line of credit from a bank may not be an option if you need funding quickly. A bank may take days to approve the line, and you might not be able to afford that kind of time.

For quicker cash, there are now plenty of companies online that offer businesses lines of credit and make the money available within a day or two. These companies may require you to secure the line with an asset. Or they may want to look at your revenues and your books to determine your creditworthiness.

Often, though, this underwriting process only takes a couple of minutes. After setting up your account, you can have money in your account by the next day or even within a few hours.

There is one thing to be cautious about, though. Nothing is free, and that’s especially true when it comes to quick, unsecured cash. Carefully analyze the fees on these loans before you accept any cash. You may find that you’re paying an annual percentage rate of 40 percent or more, depending on the funding partner.

Also, some providers force you to stick to a set schedule that may only be a few months long. They collect the payment by auto-debiting your checking account on a monthly basis. If you’re not prepared for that, the line of credit repayments could cause a whole new set of cash flow problems.

Merchant Cash Advance

Do you generate a significant number of credit card sales? If so, you may want to consider a merchant cash advance. As is the case with lines of credit, you can find plenty of merchant cash advance lenders online with a simple search on Google.

In a merchant cash advance, the funding partner looks at your past credit card receipts, usually over the past few months. They will then make you an advance based on your expected upcoming receipts. They collect on the advance by taking a portion of each of your credit card transactions.

The benefits of merchant cash advances are that you can get the money fast and there’s not a whole lot to the application process. It’s based more on your revenue than your credit history, which is a good thing if you have poor or no credit.

The important consideration, though, is whether you can afford to lose a percentage of each of your credit card transactions. When you add up all the fees, you could end up paying a significant amount in interest. If you’re already operating with tight cash flow, how bad will it be when a chunk of each sale goes back to the lender?

Merchant cash advances are great when the cash will go to a specific purpose, especially one that could grow your business. However, if the advance is just to fund operational things and to overcome revenue gaps, it could do more harm than good.

Factoring

Factoring is a great solution when you have customers who aren’t paying their invoices as quickly as you would like. A factoring company advances you money based on your outstanding receivables. Usually the advance is a significant percentage of the invoice, like 80 percent.

Then, the factoring company collects on the invoice directly from your customer. When the factoring company receives payment, they deduct the amount they already advanced to you, keep a small portion as a fee, and then forward the remaining balance onto you.

There are a few great things about factoring. One is that they’re more interested in your customer’s payment ability than your credit. Another is that they can get the money to you quickly, sometimes within a day or two.

However, another great benefit is that they basically take over your receivables operation. You no longer have to worry about tracking down payments because they’re doing that for you. Many factoring companies are discreet, so your customer won’t know that their payment is going through a third party.

You get your payment quickly and someone else takes care of bill collection. Of course, as is the case with all of these methods, you should make sure you understand the fees and project how those fees will influence your cash flow.

Examine all your options and don’t jump at the first funding partner who offers you money. If you have a strong business, you’ll have no lack of companies willing to advance money to you. Make sure you choose the option that best fits you and your needs.

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Great work guys. This is the most complete information about factoring and QuickBooks I've been able to find online. Thanks a bunch!

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