Many businesses rely on accounts receivable financing to help them grow their business. Accounts receivable financing uses a company’s current invoices to secure funding. It is a type of business loan because it uses the value of those outstanding invoices to get cash now.
How Do Accounts Receivable Financing Companies Work?
Accounts receivable financing companies will advance your funds based on the value of your invoices-around 80 percent of their total value. This means that you get an immediate cash injection without having to wait for payment. Your customer still pays your business directly, but instead of waiting 30 or more days for payment, you can get paid now and pay the accounts receivable financing company back after receiving payment from your customer.
The accounts receivable financing company takes on the risk of not receiving payment from your customer because they are the ones advancing the funds against the invoice. You only repay them after you have received payment from your customer. This means that as long as you take care to sell to customers who pay on time and in full, accounts receivable financing can be a reliable way for your small business to get cash quickly.
What are the Benefits of Accounts Receivable Financing?
Accounts receivable financing has many benefits over other types of small business funding:
Flawless Payment Process
Accounts receivable financing company becomes responsible for collecting the debt from your clients, which means you no longer have to worry about collecting that debt. Furthermore, you benefit from this by having immediate access to cash from your invoices. Instead of having to wait 30 days or more for your clients to pay you, you get paid immediately.
You can get funded in as little as two days instead of waiting weeks or months like with a traditional bank loan. It’s also much quicker than other types of alternative lending, like merchant cash advances or equipment lease financing, which are generally faster than traditional bank loans but slower than accounts receivable financing.
No Collateral Required
Factoring companies do not require any collateral from you to secure your contract, unlike traditional funding options such as ABL facilities. There is no lien placed on your accounts receivable, and therefore you can retain possession of them.
No Long Term Obligation
A factoring facility can be set up with a few days’ notice and then terminated at any time with 30 days’ notice. There is no long-term commitment required by the lender, which means you have no long-term obligation if you choose to end the contract. This makes accounts receivable financing a very flexible funding option for small businesses.
Finally, accounts receivable financing can help you grow your business and be less reliant on traditional bank loans. In fact, accounts receivable financing is the most common type of alternative financing available to small businesses today.
Besides, a factoring facility can be set up and funded in less than three business days, while other types of loans or lines of credit may take several weeks to close. If you need immediate working capital, then factoring is the best option for your business since there isn’t much waiting involved in the process.