5 Reasons More Companies are Trying Accounts Receivable Financing
Whether a company qualifies for conventional lines of lending or not, accounts receivable financing – also referred to as factoring – can help a company struggling with cash flow problems. The funding takes place by a company essentially selling their accounts receivable to a different company for upfront cash. There is sometimes a stigma associated with this type of lending, but, as with all things, there are both benefits and disadvantages.
With this type of lending, a factoring company entirely takes over another business’ accounts receivable and all the required tasks therein:
- Collecting money from customers
- Denying past-due customers future lines of credit
- Researching purchasers credit history
With the factoring company handling these responsibilities, the company who has received financing is now able to devote its resources to core business tasks, like selling.
Factoring results in upfront cash for a business. The company can then use that cash how it best sees fit. If they need to buy inventory to match purchase orders, they can. If they need to invest in new equipment or a more efficient workflow to lower costs, they can. If they need to hire new employees to match the number of customer contacts, they can.
There’s nothing more anxiety-inducing for an entrepreneur than putting his or her car, house, or other business or personal assets on the line as collateral for their loan. However, accounts receivable financing is an unstructured loan, meaning there’s no need to worry. The cash received is based on the money that’s scheduled to come in, not how much an asset is potentially valued.
A popular way to raise funds, especially for a small company or a startup, is to sell equity in the company. Selling equity can infuse the business with cash, but ownership percentages become diluted. As the company grows, profits are then further and further split, and, eventually, the original owner may even lose control of his or her company. Factoring requires no equity be put on the line, reducing the risk of a potential takeover.
One of the significant issues of allowing customers 30-, 60-, or 90-day payment terms is the amount of revenue coming into that company is now based on the credit of their customers. After all, expecting to receive the money in a month is a lot different than actually receiving those funds in 30 days. With accounts receivable financing, though, the company can receive funds from a purchase within a week, if not a couple of days, from the time of sale.
Factoring is useful to companies who may otherwise lack the ability to take out traditional loans. Business will be able to receive money quickly and without resorting to collection agencies to ensure payment.