Is Accounts Receivable Financing Right for You?

Is Accounts Receivable Financing Right for You?

If your business needs funds sooner rather than later but you cannot secure traditional loans, accounts receivable financing may be the solution. In this agreement, you sell future or outstanding receivables to a finance company at a percentage of the invoices. You can get cash immediately, while the customer pays what they owe to the company rather than your business. There are a few reasons this is a great option for small businesses, but it does not come without its problems.

Pros

  • No restrictions on use—While some traditional or SBA loans have restrictions on how funds are used, accounts receivable financing gives you the freedom to meet your business needs. Whether it is more employees, more inventory, equipment, or marketing, the cash can cover what is necessary.
  • Get funds quick—Even though getting traditional financing is faster today than previously and technology allows for faster payment from customers, you cannot always receive those funds as quickly as needed. This arrangement provides access to the money approved.
  • You only pay when you get paid—With a loan, you must pay the debt regardless of your circumstances. Accounts receivable financing depends on receivables; if you do not sell inventory, there are no receivables owed. This can be helpful for your business if it fails.

Cons

  • Your clients determine your approval—This financing is easier to get than traditional forms, but it depends on your clients. If you have clients with good credit and good payment history, you should have no problem getting approved for the funds needed. However, if your clients have a less-than-stellar repayment history or poor credit, this can affect the funds approved for you or even your eligibility to receive cash.
  • It is more expensive—Easier requirements and approval come at a price. Traditional business loans usually are less expensive than accounts receivable financing, as there is less risk involved.
  • You may have to change your processes—You may be asked to drop clients with poor credit or even switch how you conduct business when you are working with a finance company. You still have ownership, but you may have to change how you do certain things to ensure a successful partnership with your lender.

If you need a quick and easy way to get funds to help your business grow or run smoothly, accounts receivable financing can be a viable option. If you have a reliable clientele and a willingness to do things a little differently, this financing can help when traditional loans cannot

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