Getting Started with Receivables Financing


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Cash flow problems are among the most challenging issues facing small businesses. These complications could occur when your business is expanding or even trying to meet its daily financial obligations. These problems are discouraging and stressful. And to make it worse, it could even drive some firms out of business.

Many businesses are not sure precisely what accounts receivable financing means. Some may even be unsure why they need it. Here is an essential guide to what it is.  

What is Account Receivable Financing?

Accounts receivable financing is money owed to a business by an account holder for purchased items through credit. A few examples of such purchases are goods bought at a retailer, services purchased from a service provider, equipment sold by a manufacturer, etc. 

Here’s an example of how it works:

  • Your company has $100000 in accounts receivables from customers who haven’t paid for goods purchased on credit.
  • You may need cash right away to pay for salaries and building renovation. You call a factor and apply for funding by submitting invoices and other required documentation.
  • The factor funds $80,000, which is 80% of the total invoice amount. The percentage can vary depending on other variables, such as customer credibility and industry type. 
  • You meet your expenses with the funds.
  • The factor charges you weekly or as agreed until they paid the invoice.
  • You pay directly to the factor. In return, the factor pays back the balance in amount after fee deduction.

It’s a good idea to comprehend what this financing method involves if you’re contemplating it. Simply put, a business must receive payments from its customers as accounts receivable before the company can begin making payments on accounts receivable to its customers. This presents quite a few significant problems for a business. 

Advantages of Accounts Receivable Financing

This type of financing allows a business owner to use customer accounts receivable as collateral on loan. Essentially, the business receives payment from its customers when they make their payments on that account. The firm then pays that customer a lump sum, which it then pays back to the lender. Because this type of debt is more secure than other debts (such as personal loans and home equity loans), this can mean a lower interest rate and a longer repayment term.

A business with such financing has great flexibility. One example is that the company can use its customer accounts as collateral when working with a lender. Therefore, a business is better positioned to negotiate a better interest rate or even get a lower one. 

In the past, companies often ran into difficulties because of being unable to access enough capital to meet their needs. Still, with accounts receivable financing, they can typically do so.

Disadvantages of Accounts Receivable Financing

First, there is the risk that the customer accounts receivable will not generate enough cash flow to pay back the loan. If the customer accounts aren’t generating enough money, a business may not meet its obligations to the lender, which could make the lender repossess the business’s assets.

Some businesses find they generate enough money to justify accounts receivable financing. In these cases, the lending institution may require a personal guarantee from the company to provide them with the needed funding. 

For instance, a manufacturer may need access to capital to expand their business in the face of competition from foreign companies. Here, they may seek an American-based lender willing to provide them with the required financing. The downside to this route is that the manufacturer may have to give up control of the business should they end up in bankruptcy or have other problems that prevent them from meeting their financial obligations to their lenders.

Conclusion

Regardless of which route a business takes when it needs accounts receivable financing, they should make sure that they consider all of their options before making any final decisions. This will help them determine whether they are better off with it, working with existing credit or applying for credit from a private lender. 

Businesses should also consult with a financial advisor to ensure that they can meet the terms of any loan they take out with a bank. They may even want to consult with their accountant to ensure that they can afford to repay the loan once it’s paid off.