No business owner is a stranger to all the struggles of running a company, especially when it comes to dealing with cash flow shortages and coming up with enough working capital to keep the company afloat and growing. And in times when other modes of financing like applying for small loans are limited, business owners resort to A/R financing. But the question remains, is A/R financing the best option for your business?
A/R Financing Defined
A/R or accounts receivable financing is done to help companies free up some capital that are otherwise stuck in accounts receivable. In this method,
The amount of money the company will receive will depend largely on the age of the receivables. A company that has old receivables can expect less compared to the value of newer ones—this is what is known as “factoring”.
Is A/R Financing Going to Be Beneficial to my Business?
Business owners resort to A/R financing mainly because of the following benefits:
- It provides for a relatively quick mode of financing. A/R factoring does not need an elaborate business plan or tax statements. It is really a quick cash option for businesses suffering from fund shortages.
- A/R allows businesses to free up some capital. Most businesses have some of their assets and capital tied up in inventory. With A/R funding, those tied up capital can be used right away.
- It allows you to skip the part where you need to outsource your accounts receivables to a third party manager. By passing off the task of collecting altogether, A/R financing helps you save on your resources and you can just divert your energy to other activities that are more productive and profitable for your company.
A/R Financing Potential Drawbacks
A/R financing can provide a business with a lot of benefits, but it may also come with some potential drawbacks. Probably one of the biggest considerations when it comes to A/R financing is the cost associated with it. If you think about it, a discount cost of 5% may not seem much initially, but if you’ll look at it over a course of several months or a year, then you’ll find that the accumulated costs far exceed the interest levied from a bank loan or credit. Remember that different financing companies offer varying A/R financing rates, so you really need to shop around in order to get the lowest fees and interest rates.
Sound business decisions are essential to the growth of the company. You need to make certain sacrifices in order to keep the operations going. Taking the A/R financing route can sometimes spell the difference between your company’s survival and failure. It would be wise if you invest some time in finding the best A/R financing deal for your business.