What You Need to Know about Accounts Receivable Financing

For many businesses, their biggest source of problems is not lack of money, but less than optimal cash flow—the cash needed to pay vendors and employees, market the business and attend to the host of other necessities of running a business. If your money is not coming in as quickly as you need it to, there are several strategies you can adopt to get things moving. One such option is accounts receivable business financing, and here is a bit of information about this service, and how it may help your business.

What is Accounts Receivable Business Financing

This service provides immediate cash through the purchasing of your invoices—the financing company  assumes the risk in the event the invoice is not paid. Typically, your customer will then pay the company directly, and you will receive the balance, minus their fee for the service.  In most cases, anything more than three months past  due will not be collected. Typically, your business will receive 80 percent of the total upfront.

What Are the Benefits

There are many benefits to small business receivables financing. Quick access to much-needed money is probably the primary benefit for most people. Secondly, by selling your invoices to a financing company, the time-consuming task of tracking and following up on late payers is no longer your responsibility. You have more time to focus on the activities that directly contribute to increasing revenue. Many businesses may experience cash flow issues because so much of their capital is tied up in their inventory, so getting paid as quickly as possible for their products and services is paramount—accounts receivable financing makes this all possible.

How Much Does It Cost?

The fees can vary based on variety of factors, and may be anywhere from one to three percent, sometimes more. The age of the invoice, the amount, volume of transactions and your creditworthiness are some of the primary considerations.

Is It Right for You?

Before you use any sort of financing service, it is important to consider whether it is the best strategy for your individual circumstances. Many financing companies specialize in certain types of industries, and when seeking out a provider, ask about whether they handle your industry or method of transaction. If you are looking at this strategy as some sort of solution to a long-term problem, you may need to re-evaluate your business practices to address the larger issues with your financial situation.

Using this type of funding can have its drawbacks, but I suppose that can be said for any type of financing service. In the short-term, losing 5 percent of an invoice may not seem like much, but if you look at this as a long-term strategy, it may be more costly than the interest you would have paid on a loan or line of credit from a bank. The rates companies charge can vary greatly so shop around first before you enlist a company’s services. Also, you should consult with your accountant or other financial adviser for guidance.

Kelli Cooper is a freelance writer who blogs about a variety of business topics.


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