Accounts Receivable Financing Tips for Today’s Busy Entrepreneurs
If you’ve been looking into alternate sources of financing for your business you may be considering accounts receivable financing as an option. This form of financing has become increasingly popular for small businesses in the modern age. Not only is it an alternative when traditional loans forms are unavailable, but this form of financing can work for a number of situations. Continue reading to learn if this loan type may be right for your business.
What it Is
This type of financing is also called factoring. It is the process in which a business sells outstanding invoices, also called accounts receivable, to a factoring or financing company. The business gives up all rights to the invoice in exchange for immediate cash, usually at a discount from the invoice’s original value.
A few of the benefits of accounts receivable financing include receiving cash quickly in the form of working capital. This type of financing usually has a quicker turnaround when compared to traditional loans, and you can use the money where it’s needed in your business. It also means you won’t have to spend time collecting invoice payments as most factoring companies like to take care of that for any invoices they hold. Other benefits include maintaining company ownership, and not having to worry about putting up collateral.
Things to Remember
The first thing to remember is that once an invoice is sold, your company no longer has any right to collect on it. Any payment on the invoice goes to the factoring company. You should also note that when you sell an invoice to a factoring company the customer the invoice is for will be notified. To keep the business customer relationship positive, you make want to take the time to inform any customers affected about the changes yourself. Your factoring company may also ask you to cease business operations with high risk customers, or base their rates on your client’s payment history. If a customer fails to pay their invoice it can also affect rates.
Using accounts receivable financing can be a good alternative for taking care of your business’s funding needs. Your business may be able to get quick funding for a variety of needs and you won’t be risking your company ownership or collateral. Remember, the rates the factoring company may charge are based on your customer’s payment history, and you may want to take the time to explain the changes to any affected customers yourself in order to maintain a healthy business relationship with them.