Why Accounts Receivable Financing Is a Great Option
Account receivable financing, sometimes called AR financing, is a business tool that has been around for hundreds of years. In the simplest terms, AR financing is using the unpaid invoices owed to your business as an asset to secure needed funds. Here are just some of the reasons why AR financing might be a great option for your company.
AR deals can be structured as either a loan or a sale. When the agreement is a loan, the finance company provides capital equal to a percentage of the unpaid invoices owed to your business. The invoices are the collateral for the loan. This can be set up as a line of credit, allowing you to draw from it on as-needed bases. When the structuring is a sale, this is usually called AR factoring and a factoring company buys a portion of the accounts receivable. Factoring is not a line of credit and a new deal will have to be set up each time you need to bring in more funds. Factoring companies also usually take over the collection of the unpaid invoices which can take the hassle away from your business but could also potentially be disruptive for customers if not handled correctly. Both options come with their own fee structures and qualification requirements.
Less Hassle Than a Traditional Loan
If you are considering accounts receivable financing for your business, it’s probably because you need access to working capital for growth or unexpected expenses. Traditional business loans can be hard to come by and take a long time to process. AR financing options often have a lot fewer hoops to jump through than a business loan. Many AR lenders can link directly to your account receivable making the process much quicker, with a short turnaround from application to cash in hand. Also, in many cases, the lenders care more about the creditworthiness of your customers than that of your business. This makes this type of funding a good option for newer businesses without much of a credit history who are in need of capital to propel growth. If you choose to sell your invoices through factoring, your company is not taking on any new debt and there are no longer-term payments to contend with in the future.
When it comes to finding funding to help grow a business or cover unexpected expenses, most business turn to some type of financing. Account receivable financing allows some businesses to use the unpaid invoices owed to them as collateral or an asset to find that needed capital. With flexible structuring and less hassle than traditional business loans, AR financing is a great option to consider.