A customer loan is exactly what it sounds like. Your company can take out a loan against money that is owed to you, so its essentially loan from yourself. When you need money quickly, it may be the unfortunate option that you actually get approved. If you find the right bank or loan institution, you can even negotiate a reasonable card payment and get an affordable rate. Some banks currently offer less than 2% for loans up to thirty days. The additional month can be a huge increase if you have just made a large sale of existing stocks and need money to buy additional stocks while waiting for payment at the latest sale.
The difference between a debt financing loan and more traditional loans is that banks are looking at credit points and payment history for those who owe you money instead of your own story. For those with bad credit or companies that have just begun, it may be beneficial to see the bank looking at the customers you bill instead of you when trying to get hold of some working capital financing. Traditional loans are always hard to come to, especially in this economic climate, unless you happen to have stellar credit or much security.
What is Factoring?
One of the oldest economic routines because traders find it hard to hit the end is to sell accounts receivable as a percentage of their value. This process is called factoring, because when you sell your accounts, you sell them to a factor. The exercise is very common in the collection industry. Therefore, you often hear from several debt collection agencies on the same debt. The first will try to collect and then sell it to another agency, one which is actually a factor, for a percentage of the debts paid value. They then use the cash to expand their business or buy debt from other authorities.
Your bank may not be able to buy your accounts directly because they are not responsible for debt collection, but there are a number of agencies and websites where you can find someone to take the unpaid invoices out of your hands. What you want to do when shopping for this type of loan is to seek out the highest amount of debt that the factors are willing to offer. They will not pay dollars for dollars, so do not waste your time asking, but some will give eighty or ninety cents per dollar if they can see a strong likelihood of getting quick payment.
History of Factoring and Accounts Receivable Financing
The practice of buying someones debt against cash payment goes back to precolonial England, when merchants would sell their invoices as opposed to cash to pay workers and finance businesses. Since many of these traders drove small businesses, credit ratings were evaluated by their buyers before the money was given. Just as it is today with smaller companies selling goods and services to larger, more creditworthy companies, the trader himself could not get funding if he had no fixed commitments from major distributors and retailers. This early form of debt financing loans lay the foundation for what would be an invaluable source of funding in the late 1900s and early 20th century.
After the civil war in the United States, new markets opened up with the development of what was considered advanced technology at the time. The invention of the cotton seal 1793 had actually given merchants the tools they needed to mass-produce textiles, but transport methods were still primitive. By the 1870s steam engines and ironed ships made the world a smaller place and telegraph lines made communication much easier. Industrial Revolution began and again, small businesses and independent traders sold goods and services to major manufacturers and textile factories. Factors became popular again and banks began issuing their own version of accounts receivable.