Is Accounts Receivable Financing Right For Your Business?
Accounts receivable financing can be one solution for a small business seeking to maintain funding when traditional methods might not be available. One of the oldest forms of financing, accounts receivable financing, or factoring, is when the invoices, or accounts receivables, are sold by the business to a specialized finance company. The receivables are sold at a discount and the financing company making the purchase agrees to assume the risk. In return they provide monetary compensation. The finance, or factoring, company now owns the invoice, meaning the customer pays them. However, the small business gets an immediate payment from the finance company and no longer has to worry about when the sold invoice gets paid. It is important to note that the newer the invoice the more value it will have since old invoices might already be past due and considered high risk.
One major benefit to accounts receivable financing is that it doesn’t require you to give up any equity. Your business stays entirely yours. You can even use your cash where you need to for your business. Another great benefit is that unlike many traditional loans accounts receivable financing won’t require any collateral. Add this to immediate payment and no longer having to worry about the invoice, and you have several good reasons to consider accounts receivable financing.
When making the decision on if this is the right type of financing for your business you’ll also want to keep the cons in mind. In addition to the cost and contract length, one small disadvantage may be a small loss of control. The financing company may inform you that certain customers have a poor credit history and ask you not to do business with them. Remember the financing company is purchasing your accounts receivables at a risk, and they will want to minimize that risk to themselves. They will also not collect outstanding payments and these may raise the cost you owe your financing company. Finally, there is some stigma attached to the idea that accounts receivable financing implies your business is in trouble. It’s important to keep open communication with your customers and explain to them that it was simply the right fit, and you intend to be around for the long haul.
Now that you understand what accounts receivable financing is, you may weigh the pros and cons for yourself. Remember, it’s about your business’s needs so don’t be afraid to ask questions and find out if this is the right financing solution for you.