The Benefits and Drawbacks of Accounts Receivable Financing

The Benefits and Drawbacks of Accounts Receivable Financing

Accounts receivable financing is one of the oldest types of commercial financing available. In a nutshell, it is a process in which a business’s receivables or outstanding invoices are sold to a financing company for a quick influx of cash. Once the invoices are paid, the amount paid is in turn paid to the financing company. Otherwise known as the factor. Invoices are generally payable within more than 180 days. However, most financing companies prefer to buy invoices that are newer as opposed to those that are delinquent or close to becoming delinquent. 

Benefits of Accounts Receivable Financing

The biggest benefit of accounts receivable financing is the quick influx of cash that it can provide to a small business. The idea is that you are receiving a loan for money that is owed to you that you haven’t collected. There is little risk involved compared to other types of small business loans. There is also no need for collateral, nor is there a need to turn over part of your business ownership. 

Drawbacks of Accounts Receivable Financing

Even though accounts receivable financing seems like a great way to gain capital when you need it. There are some drawbacks. First of all, it often comes with higher costs than other types of small business loans. If you are unable to collect your invoices within a predetermined time, the amount that you need to pay back will only increase. You are also more likely to have to enter into a longer agreement with accounts receivable financing. You can get into shorter and more viable agreements. Therefore, be sure to negotiate the terms of any financing agreement before making a final decision.

Even with these drawbacks, accounts receivable financing can be a good source of capital for your business. You do need to know exactly what you’re getting into, however. If you have any questions about whether accounts receivable financing is right for your business, contact Champagne Global Capital Lending today. We will be happy to answer any questions you might have.