Using Accounts Receivable Financing as an Alternative to Bank Loans
Accounts receivable financing is a time-tested financing method for producing quick working capital. Also known as factoring, this type of financing involves selling invoices to companies who will then do the work to get those invoices paid. You get a percentage of the total value of the invoices, and the factoring company charges a fee to collect payment from your customers. While there are both advantages and disadvantages to factoring, it may be an option worth exploring if your business is in need of cash flow.
The most obvious benefit of a factoring loan is the quick influx of cash to your company. If you have expenses that need to be paid in a hurry, this might be your best financing option. It allows you to pay your bills with money you have already earned by providing the products or services on the invoices. It can also allow you to expand your business by purchasing more inventory or hiring new employees. If you have difficulty getting a traditional loan and need money quickly, factoring can help.
Because the invoices bought through accounts receivable financing represent money you are already owed, you do not have to put any asset up as collateral to receive the payment from the factoring company. You are already selling the company something it wants and can use, so there is no need to risk any of your tangible assets. Unlike selling certain stocks in your company to raise capital, you also do not have to give up any ownership of your company to get the money. While the factoring company may require you to adjust some of your business processes, the business itself remains yours.
A happy fringe benefit of factoring is the amount of time it saves you and your employees by taking on the job of collecting payment from your customers. With that task off your to-do list, you can focus on other aspects of your work, such as innovations or sales. Essentially, in addition to paying you money for your invoices, the factoring company saves you even more money by taking work off your plate that you otherwise would have to pay someone to do.
If you need money fast, and your finances are being held up by lots of unpaid invoices, accounts receivable financing may be the best option for resolving this dilemma. You get quick cash that you don’t have to worry about paying back to a lender, and you still stay in control of your business.