Ask the average business owner to describe the “perfect line of credit” and you’ll probably hear something like “having access to as much low interest money as I want whenever I need it for whatever I need it for as I grow my business”. Unfortunately, for the vast majority of business owners a line of credit like that is simply not available. Fortunately what is available is an Accounts Receivable (A/R) Line of Credit that can be described this way “money that you can access whenever you’ve made a sale so you can pay; payroll, suppliers and taxes on time as you grow your business.”
While this second description does not have the obvious appeal of the first, paying creditors and taxes on time
and consistently has always been one of the keys to business success. Many suppliers are also prepared to offer
extra services, generous terms and significant discounts to their best paying customers. Unlike other sources of
funding they don’t demand interest, collateral, personal guarantees or equity in return. An A/R line is also
easier to qualify for, advance rates are higher and it can be increased quickly if sales grow.
The only negative to an A/R Line of Credit is that it’s more expensive than a traditional bank line and a lot of
business owners refuse to properly consider it as an option for that reason alone. This is unfortunate since A/R
financing is often the perfect solution in the right situation and can be a reliable source of vital funding through
even tough times. For companies that are pre-bankable, turning around or just growing very fast an A/R line
might be as close to an operating line of credit as they are going to qualify for.
The main reason that A/R financing is more expensive is that it includes ongoing professional A/R management.
Modern systems are used to manage and report on the A/R, ongoing credit reports are purchased from a
variety of agencies and skilled people are needed to manage the whole process. This comes at a cost, however,
when close attention is paid to the A/R then bad debt is minimized and A/R turnover is improved. Most business
owners who have used A/R financing come to value the services almost as much as they appreciate the
ease and flexibility of the funding source.
So when you next meet someone who is struggling to qualify for a line of credit or seems to be expecting
too much out their line, then you should suggest to them the next best thing. Growing or turning around a
business without giving up equity is a huge challenge. But with hard work and the right source of cashflow
support it has a much better chance of doing just that. A/R Financing might not be the perfect line of credit
but it is very close.
Written by Tom Klausen
Source: First Vancouver Financial Services Ltd
Tom Klausen is President of First Vancouver Financial Services, Ltd and has
had extensive experience in providing alternative financing solutions to
small business owners. He also provides management consulting services to
non traditional lenders throughout North America.