Accounts Receivables: The Good and the Bad

Most small businesses look for some kind of funding to bolster their cash flows during difficult times. One option is to use your unpaid invoices to obtain an influx of working capital through accounts receivable financing. Here are some advantages and disadvantages of using this form of funding to stabilize your business and help it grow.

The Basics of Accounts Receivable Financing

In accounts receivable financing, also known as factoring, a financing company purchases your unpaid invoices and sends you an advance of 75 to 80 percent of their value. When your customers pay their bills, the factoring company sends you the rest of the value of the accounts receivables after subtracting its fee. The percentage of the advance that you receive depends on the creditworthiness of your clients.

The Benefits of Accounts Receivable Financing

Factoring your accounts receivables offers you a way to acquire quick cash when your company is experiencing seasonal downturns or other cash flow difficulties. Loans and lines of credit from traditional banks and financial institutions may take months to obtain, but after your invoices are approved, you can have funding from your accounts receivables in a matter of days. Your business credit rating is not as much a factor in approval as in traditional financing, as the factoring company is more concerned with the credit ratings of your customers.

Accounts receivable financing steadies your cash flow and gives you the working capital to take advantage of opportunities for business growth by hiring employees, purchasing inventory or equipment, or creating a marketing campaign. You don’t risk losing equity in your business or assets as collateral with accounts receivable financing.

The Drawbacks of Accounts Receivable Financing

The cost of obtaining financing through your accounts receivables is generally higher than acquiring loans through traditional channels. Some factoring companies have you sign lengthy contracts before you can obtain funding, but this is not always the case. Some business owners feel that there is a stigma attached to accounts receivable financing, although you can alleviate this concern by clear communications with your customers.

For more advice on financing through accounts receivables, contact Flipside Capital.