Turn Those IOUs Into Investment CashApril 7th, 2014 by The JetSetter Team | Comments Off on Turn Those IOUs Into Investment Cash
We’ve all received them—those pesky little notes promising that money will be paid to us in the future. While Jason Hartman suggests investing with your own money, you may have had someone approach you needing money for their investments, a fancy vacation, etc. As it turns out, all of those bits of paper can actually work in your favor.
These little liabilities tell lenders you may be working with that you’ve got enough cash on hand to lend it out. This is particularly true if money is owed to you by other businesses.
Through a process called factoring, you can use the money owed to you by others as collateral in a loan agreement from a financial institution of your choosing. Then, you’ll receive an amount of money worth slightly less than the receivables in your books. Once the money is collected, you’ll receive the full sum if you need it.
This setup transfers risks you might associate with limited cash flow to the company that finances your project. By using a lender, you’re able to continue your business as normal on a day to day basis. You’re also able to focus on your responsibilities as owner without the added pressure of tracking down unpaid invoices (though you’ll probably still want to pay attention to that area).
Factoring is particularly useful for new or small businesses in need of quick financing. Like with anything, there are a few things to be aware of as you consider your options. First, in order to consider factoring, the money you are owed must be from another business (and not your great uncle Larry).
Next, keep in mind that lenders will be looking at the credit reports of the businesses that owe you money. Of course, larger companies that are well established will be more likely to positively influence others to lend you money. A small, local business still counts, but will hold less value than the big name brand borrowing your money.
Expect to pay around 2% of your grand total in fees and miscellaneous charges. While this can certainly add up, it is undoubtedly better than alternatives like cash advance loans or the interest you’d pay on a credit card.
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