How Accounts Receivable Financing can Foster Success
Accounts receivable factoring can provide your small business with the working capital it needs to cover cash flow gaps and to fuel business growth, so that business success is more achievable. There are other advantages as well to be derived from accounts receivable financing, which are not possible with traditional bank loans or other sources of capital.
How accounts receivable financing works
Generally only a portion of a company’s invoices are sold to an alternative lender (although all can be sold), for approximately 80% of the face value of those invoices, in exchange for immediate cash. That cash can then be used to cover any shortfalls in revenue, as well as business improvements – all without waiting for invoiced customers to pay the bills. Instead, the factoring company purchasing those invoices becomes responsible for recovering payments from the customers. Once those invoices are paid, the factoring company remits the other 20% of the invoice amounts to the original company, after subtracting their own factoring fee.
Benefits of accounts receivable financing
One of the great things about Accounts Receivable financing is that your company does not need to have great credit history in order to be eligible. It’s much more important that your customers have solid payment histories, since they’re the ones paying on the invoices. If your company has not been in business for a long time, or if you don’t have particularly solid credit history, this can be a source of revenue that you might otherwise be unable to obtain.
Perhaps even better, Accounts Receivable financing can be carried out very quickly, usually in a week or less, as opposed to a traditional bank loan which would be expected to take up to two months before being approved and finalized. If you had business opportunities that required quick action and investment, this would be one way that you could take advantage of that opportunity. The speed at which A/R financing can be transacted makes it a far more flexible option than traditional loans.