The Benefits of Accounts Receivable Financing

If your business needs additional funds, whether it’s to bolster cash flow, keep your business running smoothly, or purchase more inventory, your first thought might be to apply for a loan. If you have short-term financing needs, however, a loan just may not make sense. Another option to consider is the accounts receivable (A/R) financing. Here are some benefits of this financing solution.

A/R Financing Isn’t a Loan

Accounts receivable financing isn’t a traditional loan. While you receive a sum of money, you don’t have to pay it back in fixed installments. Instead, you sell a company (called a factor) your invoices for a fee. The factor then advances you a majority of the total (up to 90% to 95% in many cases). After your customers pay their invoices, you receive the remainder of the total minus the factor’s fees.

You Don’t Have to Deal with Payments

When you sell invoices, the customers pay the factor instead of you. This relieves you of the responsibility of collecting payments, enabling you to focus more attention on your business.

Financing Is Easier to Obtain

Having less than perfect credit makes it difficult to qualify for a traditional loan. With A/R financing, the factor is more interested in the credit history of your customers. While they do take your credit into account, your customers’ credit rating holds more weight.

You Can Use A/R Financing to Meet Short-Term Cash Needs

If you need money right away, whether to pay operating expenses, meet payroll, or jump on a business opportunity, A/R financing can help. You receive funds quickly, enabling you to meet the needs of your business. This can help you to avoid late payments or missing potentially lucrative opportunities that might not come around again.

You Can Choose Your Financing Option

You have a couple of options when it comes to A/R financing, full-service, and recourse. With full-service factoring, the factor assumes all of the risks. While you may have higher fees, you aren’t held responsible if your customers don’t pay. With recourse factoring, you have to buy back the invoice if your customer doesn’t pay. If your customers have a good track record for paying on time, though, this option often comes with lower rates.

A/R Financing Is Flexible

You get to choose which invoices get factored. You don’t have to submit all of them. Keep in mind, though, that factors will likely only take invoices from customers who will pay on time.

Loans aren’t always the best solution for small businesses. If you have short-term cash needs and have invoices to leverage, accounts receivable financing can give you the money you need to meet your business goals.

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