As a small business owner, sooner or later you’ll need a loan. You may want to use the money to help solve your cash flow difficulties such as paying overhead and payroll, or you may need some funding for your business growth. And obviously, you’ll turn to banks for a loan. But many businesses these days are turning towards alternative lenders who can provide accounts receivable financing.
In this method of financing, you use your accounts receivable—you get 70-80% of its value right away, instead of waiting for 30 or even 60 days to get your money. And one of the most notable features of this method is that accounts receivable financing is based on customers’ ability to pay.
Why is it important that accounts receivable financing is based on customers’ ability to pay? Here are some reasons why:
- It speeds up the financing application process. Banks are notorious for acting slowly on loan applications. There are loan application papers which may total up to three inches thick. You have to disclose your business model, your revenues, your expenses, your assets, and everything else simply to provide the bank with the answer to one crucial question: will you pay back the loan?
- Since accounts receivable financing is based on customers’ ability to pay, your credit has nothing to do with the approval for the financing. Everything is much faster, because the lender just checks how often and how quickly your customers pay. If they have a consistent history of paying fully and on time, then the financing is good to go.
- The approval rate is higher. This is why the approval rate for bank loans is not that encouraging: banks want your credit history to be absolutely pristine and your business should be efficient and doing well. It actually seems that they only want to lend you money only if you don’t need the money in the first place.
- If you show signs that there is a possibility that you won’t be able to pay back the loan, then your loan applications will probably be rejected. Banks are very wary these days and they don’t want to take part in risky loans.
- You get assistance in researching customers. It’s hard to run a business when customers don’t pay promptly. But it’s also difficult to run a business successfully if you insist on getting paid up front every time. If you require that all customers have to pay when you deliver the goods or services they need, you won’t have too many customers.
- So you have to extend some form of credit to your customers. However, there’s always the risk that a customer won’t deserve the credit at all. But because accounts receivable financing is based on customers’ ability to pay, you have experts investigating your new customers for you, so that you have a pretty good idea of their paying history even if you don’t have any experience with them yet.