A modern business faces many challenges - identifying a market, financing operations, obtaining product to be sold, attracting customers, capturing revenue, retaining customers and (hopefully!) earning a profit. While many of these challenges present uncertainties beyond the control of managers, financing isn't one of them and that's where borrowing against business receivables can help.

Before we can discuss how borrowing against business receivables can help, we must first understand the context such activities take place in.

Very few enterprises operate on a "cash and carry" basis; that is, many companies will first ship product to customers, only receiving payment at a later date after goods have been received. Effectively, the company has arranged a short term credit line for the customer. This arrangement - called "terms" - are formally documented and agreed by both buyer and seller before the actual transaction takes place.

There are no set rules for terms, but it is not uncommon to seepayment delays - terms - of 30, 60 or even 90 days. Called "net 30", "net 60" or "net 90" by business people, the selling company is offering buying customers 30, 60 or 90 days credit, immediately shipping orders but not requiring payment for the specified number of days. The company receives payment and then, in turn, pays its own bills from revenue received. This process of a business advancing credit to customers, receiving payment and then in turn paying its own bills is called "cash flow".

While its easy to see how this arrangement can help modern businesses attract and retain customers, like any solution it can create problems of its own. Obvious problems like customers failing to pay are only the tip of the iceberg; where a company can encounter serious difficulty is due to lack of cash flow, and the reason for this is simple. When a company obtains or creates a product to be sold it incurs various costs, also known as overhead. There are two types of cost; direct and indirect.

Direct costs are due to the raw materials or labor needed to create a product to be sold. Indirect costs arise for many reasons, for example, management salaries, mortgages or equipment leases. Regardless of the classification of the cost, its is known that an inability to pay bills - lack of cash flow - is the number one reason why businesses fail.

When a company has cash flow problems there are many possible solutions such as maintaining an open line of

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