With banks and other lenders making it more difficult for businesses to get cash these days, entrepreneurs have to look at other financing options. One area that is often overlooked is accounts receivable financing.
Is Accounts Receivable Financing Right For Your Business?
With banks and other lenders making it more difficult for businesses to get cash these days, entrepreneurs have to look at other financing options. One area that is often overlooked is accounts receivable financing. Basically accounts receivable financing involves using your outstanding invoices as collateral for a short term loan. If you want to stop waiting for slow paying customers and get your money fast, then this may be an option for you.
Many commercial clients have become accustomed to paying in 30, 45 and 60 days. It can be difficult for a growing business to extend such long terms. Borrowing against your receivables will allow you to get money for your business right away. This is an excellent source for companies that are experiencing growth that they do not have the cash flow to keep up with.
There are two main types of accounts receivable financing. The first is to actually get a loan against your receivables. Newer receivable are worth more money, and many companies may not even be willing to loan against debts that are over 90 days. This type of loan is repaid, plus interest, when the accounts actually pay.
The other option is called account factoring, or invoice factoring. Instead of loans receivable and invoice on the grounds you actually sell receivables factoring company at a discount. The lender will pay a percentage of the receivable upfront, about 80% on average, and the balance, less the factoring fee, when the account is paid. This can be a valuable tool for a small business. Not only do you get the money you need right away, but also it does not show up as a liability on your balance sheet. This can be a huge advantage if you are looking to get other types of loans or credit extended to your company.
There are several advantages to using your accounts receivable for collateral. It allows a company to reduce resources previously spent collecting on debts and generate fast cash to grow the business. Accounts receivable financing also frees up capital that previously was tied up in inventory. Lenders generally do not require a business plan or tax statements so it may be easier to obtain this type of loan than some more traditional financing methods. There are of course some drawbacks. Cost can be high, so it is important to shop for the best rates. If your company is experiencing a lot of growth and is having trouble accommodating all customers because of a lack of funds, then accounts receivable financing may be the perfect solution.
Find out more about financing your business through accounts receivable factoring. Karen Morgan works for Business Funders, an online broker that specializes in all types of loans including fast merchant loans, accounts receivable loans, commercial mortgages, and hard money loans.
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