Accounts Receivable Financing Can Help Small Business Cash Flow

bringing in the cash cow

This article is contributed by James Hopes.

Are you in shortage of money?  Any small business owner would understand the trouble of trying to finance one’s business and also meeting cash flow shortages.  When credit and loans are insufficient or when there is an immediate need for money to pay the vendors and you are expecting your clients to pay up in a few weeks, where will you get the money you need?

Depending on what your business does, accounts receivable financing or factoring could be an ideal option.

What is accounts receivable financing?

Accounts receivable financing is related to selling your receivables or your outstanding invoices to a factoring company that accepts the risks on them and gives you quick money. The discount that you must accept on these receivables depends on how large the transaction is, how much risk the factoring company has to take to gather the amount due, etc.  A more recent invoice will pay more. Also any accounts receivable over ninety days are unlikely to get financed.

There are three different types of Accounts receivable financing:

  1. Factoring: You sell your invoice to  an invoice factoring company.
  2. Accounts Receivable Line of Credit: Gives a line of credit against the deemed value of the receivables due.
  3. Accounts Receivable loan or Contract Financing: Client has a long term contract to pay back a loan with the accounts receivable as collateral.

Benefits:

  1. Your company gets cash quickly without tax statements.
  2. When the management of your accounts receivable is outsourced to another company it gives you more freedom to concentrate your resources on activities more immediate to your business like selling.
  3. It helps free up working capital since many business may have a large sum of capital tied up in inventory. This means less worry and dependence on payments due on invoices by clients.

Costs:

As with any other kind of financing, this benefit of getting access to quick money will cost a financing fee. Depending on the scale of your business, the type of financing (AR factoring, accounts receivable line of credit, or accounts receivable loan), worthiness of credit, etc, the financing fees could vary from a single percent to rates/costs that could exceed that of a bank loan or credit.

Thus, it is essential to consider a number of factors before choosing this business option.

Factors to consider:

The primary question to ponder over is whether it is absolutely essential for your business to take this financing option or do you just want to take advantage of a possible opportunity.

The other question is whether your business problem is a temporary one. If it isn’t, it could mean that something bigger needs to be addressed. You must understand that this method for getting quick cash cannot be used to buy time to hold off for a while, some other more critical factor that cannot be stopped.

The best way to go about it would be to consider all other small financing options, and then consult with your accountant to understand the full implications of the immediate financial impact on your company in taking this step.

Also, since a financing company is not a bank it is essential to investigate the companies that you are considering the option with and make sure you are not buying trouble down the road..

Author Bio: James Hopes is a financial advisor for businesses and individuals. He also helps provide information on various options for business cash advances like AR factoring, equipment leasing etc. through his posts.

Photo credit:

bringing in the cash cow image courtesy of Silicon Prairie News via photopin cc

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