The amazing service provided by auto shops becomes significantly more amazing when you consider the industry’s chaotic business cycle. They don’t get paid until their customers pick up their cars, no matter how long a certain project may take. The majority of their customers pay with debit or credit cards, which could extend the business cycle even further. And if the shop specializes in repairs, most of its revenue probably comes from insurance companies. Depending on complications (and there always are), insurance providers could take several months to make payments. Similar problems are faced by shops that do a lot of work for large companies or government entities.
As you can see, it’s completely normal for an active auto repair shop to have very little cash on hand. One potential solution to this ongoing dilemma is accounts receivable factoring. You may know the basics about this type of working capital loan. But in order to understand its many benefits, you must look beyond terms and payment structure.
1. It Was Made For Super Busy People Like You
Aside from elongated business cycles, companies that pursue accounts receivable factoring have at least one more thing in common: They are all extremely busy. They don’t have time to compile a large stack of financial documents and might not remember to make payments every month or if their interest rate has gone up. In addition to having plenty of work to do all year round, auto shop owners are typically in charge of serving customers and managing finances. Getting a lump sum of cash or having to keep track of a long-term payment system might only make their days more complicated.
Accounts receivable factoring was created with these business owners in mind. It’s very easy to get approved, and the rest of the process is incredibly fast. You get your money just a few business days after the business lender purchases your unpaid receivables. But before this happens, it is up to you to decide if you want all the cash upfront or at different intervals. Maybe it’d be better for your books if you received a certain amount of cash every week. Once the account is purchased, it is up to the business lender to collect the original payment. You don’t owe any more money, but you receive a little more when the payment is collected. The insurance provider or customer will know not to send money directly to you, since that would destroy one of the biggest benefits of accounts receivable loans. With no payments, additional fees or due dates to worry about, the entire process could last a matter of days.
2. The Benefits Stretch Far Beyond Extra Cash
Instead of charging interest, the business lender takes a cut from the money that is owed to you. You lose a small percentage of income, but this is just one flaw compared to virtually countless benefits of accounts receivable factoring. It’s not just about getting extra cash to make purchases or cover regular expenses. Having more money in your pocket gives you the power to negotiate upfront discounts with vendors and/or suppliers.
Accounts receivable loans can also be used continuously, letting you know almost exactly when you will get paid for future projects. You can finally save money and create a schedule for growth-related investments. If you are approached for a large project or a fleet contract, you don’t have to worry about not being able to pay your employees because all of your funds are tied up in new parts and insurance claims.
3. Just As Versatile As A Standard Business Loan
Since accounts receivable factoring is indeed a unique business funding program, you might think that its functionality is very specific. This might be true if you work with a business lender that just wants to make a quick profit and leave you on your own. The business funding experts at United Capital Source, however, are capable of arranging accounts receivable factoring to suit almost any type of investment, be it short-term or long-term. We have helped clients use accounts receivable factoring to take on new hires, stock up on inventory for the upcoming season, or add physical property with minimal impact on cash flow. You could argue that the only time you should seek a more traditional business loan is for a massive, game-changing expense.
4. Accounts Receivable Factoring Is Not “Debt”
Even though accounts receivable factoring is commonly referred to as an “accounts receivable loan,” it is not technically classified as debt. Factoring your unpaid receivables does not mean your balance sheet will say you are currently paying back a loan. So, yes, you can take out another small business loan during this process. There’s a long-standing myth that accounts receivable factoring is a “last resort” for companies that can’t pay their bills. If this was true, business lenders would have an unfavorable view of applicants that have factored receivables. But it turns out that accounts receivable factoring will actually make it easier for you to be approved for a substantial business loan, since your cash flow is in such good shape.
There’s Always A Solution
If accounts receivable factoring doesn’t sound right for you, you’ll be pleased to learn we offer plenty of business funding programs that suit the unique circumstances of auto repair shops. No matter how chaotic your cash flow may be, there is always a way to smooth it out. The quicker you look for a solution, the more options we’ll have to finally get your finances back on track.