Providing Capital: How Accounts Receivable Financing Can Help to Scale Your Business

Posted at February 4, 2020 » By : » Categories : Business Funding »
accounts receivable financing

There’s no single reason why businesses run out of funding when looking to grow, but answers can often be found in accounting and invoicing. When a business is trying to grow, accounts receivable financing can help increase cash flow based on the amount of unpaid invoices due from its clients.

Here’s everything you need to know about how it can benefit a business in a bind.

What it Brings to Small Businesses

The way that businesses have been funded for the last 50 years wasn’t working for a lot of entrepreneurs. That’s why credit and business loans have been jettisoned for other types of micro-business financing.

For many small businesses, this kind of financing is out of reach. They can’t access the kind of credit that other businesses can.

However, small businesses need to acquire financing like any other business. They also need to watch out for cash flow problems like any other business. That’s where accounts receivable financing comes in.

Business owners often use their accounts receivable book as a way to finance their business. It’s vital for them to keep an eye on what they’re spending and what they’re bringing in. If they’re looking for AR funding, business owners need to be on top of the requirements and many limitations that come with seeking out AR financing.

Selling Assets or Getting Loans

There are a lot of ways for AR financing to help small businesses. There are a few different structures to AR financing and it’s vital to know how things are set up because it can impact how you pay your loan back.

When you look at your accounts receivable, you’ll likely see a lot of items that are yet to be paid and due to your business. Those may not seem liquid or accessible to you now, but they’re still considered assets.

Your current assets via accounts receivable are considered to be part of your overall liquid assets. These are the possessions you can easily turn to cash and in many cases, take out loans on.

Asset sells are when you fully relinquish current assets belonging to your company. The accounts that you have due to your business are sold to another company in return for the cash you can use immediately. Your lender is only going to pay a portion of that value, however.

The upside is that the collection of the debt is completely on the shoulders of the new owner. You can use your cash and stop worrying about incoming cash.

There’s also the potential to structure your financing as a loan. Your accounts receivable plays a role because it’s the collateral for that loan. While your business retains ownership of that book and you must still collect those debts, you get the funding you need now.

Make sure that you’re taking out your loan at a prime rate. This is a varied interest amount. Get your team a more robust understanding of prime rates before you make any final agreements on AR financing.

Dating your Invoice

Time is of the essence when it comes to invoicing. The purchase date is an element that comes into play. It’s a factor to not only determining the types of agreements available but also how long the lender has to act.

Invoices are usually paid within 90 days or much less. A factoring company that is going to calculate your potential loan wants to fund the newer invoices over older ones. It means that they’ve got a longer time they can be collected.

Those that are beyond terms or delinquent will bring many more problems than those that are relatively new.

Consider Length of Loan

The length of your loan is going to make a difference when it comes to the kind of financing you can get and how much it’ll cost. Your agreement can go for months, one year, or up to several years. Each length brings different impacts for any type of business.

A short term loan might have a higher upfront interest rate. That’s because the lender needs to recoup costs quickly. However, a lower interest rate and a longer loan might be a better option.

It all depends on how quick the turnaround and cash flow are at your business.

Agreement Styles

There are a few major types of agreements when it comes to accounts receivable financing. There is full recourse, reserve amounts, or reserve accounts available to many small businesses.

Full recourse clauses are included in many AR financing agreements. Under these types of agreements, lenders have recourse against the businesses they work with. They can force the business to payback any invoices that the lender struggles to collect after a certain period of time.

Reserve amounts are conditions of other types of contracts. These allow the factoring company to take control and withhold some of the financing when they deem it necessary. This often takes place when invoices need to be paid.

Reserve accounts are another type of agreement altogether. With these, a percentage of the paid invoices is sent to the factoring companies who then put this money into a reserve account. That reserve account is there to cover any invoices that are deemed uncollectible.

Accounts Receivable Financing Builds Business

While accounts receivable financing might seem like a complex way to help your business grow, think again. Growing businesses will have lots of irons in the fire, often needing to strike while that iron is hot rather than waiting for money to come back. AR financing is the best way to get that money now.

If you’re thinking about opening a business line of credit, check out our guide for info.