Should You Use Accounts Receivable Financing?
Accounts receivable financing is a funding agreement that enables businesses to receive early payments on outstanding invoices. Essentially, companies use their clients’ unpaid invoices as collateral to back an immediate cash injection from a lender. The lender gets a portion of the invoice amount as a fee.
Four Ways to Finance Using Your Accounts Receivable
With three primary types of accounts receivable loans, this borrowing type can offer many benefits when you need to gain some liquidity while waiting to receive payment from pending invoices.
Businesses get a cash advance by selling unpaid invoices to a factoring company. After purchasing the invoices, the factoring company collects payments from your customers. The business receives the agreed portion of the receivables minus fees.
This borrowing method can provide a flexible option for bridging gaps in an operation’s cash flow. However, it can be expensive, and business owners with poor credit may not qualify for this financing.
This borrowing type relies on a company’s collateral assets to secure funds. It is a business line of credit that uses the borrower’s accounts receivable, equipment or inventory to back a cash advance. Asset-based lending has limited flexibility and requires considerable fees. Businesses with a reliable cash conversion cycle will likely qualify for this loan type.
Selective Invoice Financing
This option provides business owners with a flexible way to get paid early. Companies can choose which invoices they want advance payments from. This kind of accounts receivable financing typically has lower finance rates than the alternatives. Additionally, the funding does not go on the balance sheet, preventing it from impacting a business’s debt ratios or credit.
Large organizations can utilize this financing by investing in a pool of assets that generate cash flow from accounts receivables, leases, credit card balances and more. This bond or note pays income at a fixed rate for a set timeframe.
Pros and Cons of Receivable Financing
When companies borrow funds this way, they retain ownership of their business, do not require other forms of collateral, and receive quick cash advances. On the flip side, some of these finance agreements are lengthy and demand higher fees than other business loans. In addition, if your clients do not pay their invoices, you owe the unpaid amounts to the lender.
Accounts receivable financing provides businesses with quick capital when cash flow is down. It enables companies to continue daily operations while waiting for clients to pay their invoices.