Accounts receivable financing involves selling invoices to a factoring company in exchange for a large portion of their value upfront. The remainder of the invoice amount is delivered when customers make payment. The factoring company charges a small percentage or a set fee per invoice. Is this type of financing right for your business? Here are a few benefits that can help you decide:
Accounts receivable financing is essentially a way to get access to funds more quickly. Instead of waiting a month or two for your customers to pay you, you receive money almost immediately. No matter why you need capital, obtaining needed cash in a day or two is a big advantage. That’s far less time than it takes to qualify for a bank loan.
Financing for Business Operations
One reason businesses rely on A/R financing is to have the money needed to purchase raw materials or inventory. Some companies need to make an investment of capital before seeing the benefits, such as software developers. By selling unpaid invoices, they can get their products out the door and ready to sell.
Cash Flow Stability
Businesses may have periods of slower sales growth throughout the year. A/R financing is a big help for covering payments all year long. There’s no obligation to sell invoices if you don’t need to. Instead, factoring is available to supplement cash flow when required by your business.
Streamlined Accounts Receivables
Working with a trustworthy factoring company can also reduce some of your workloads. Some businesses decide to factor their entire accounts receivable department, basically turning over collections to a third party. That way they can focus on sales and not have to worry about pressuring customers to make payments on time.
Alternative Financing Without Credit Requirements
A big advantage of A/R financing is that your company’s credit rating doesn’t play much of a role in getting approved. As long as you have valuable invoices to sell, you’re good to go. What matters to a factor is the credit history of your customers and how regularly they make payments, not your personal or business credit. This is helpful for companies who are trying to repay debts.
It’s important to know that the amount of factors charge for their services can vary depending on your company’s financial stability and customer quality. If you have lots of business and customers that pay on time, you may be able to qualify for even better rates. Accounts receivable financing is just one option available to you, but it’s a great tool for many businesses.