Account Receivable Financing – Good Idea or Bad?

There are pros and cons to every method of getting additional financing for your company, and that applies to account receivable financing as well. In this type of financing, you make use of your accounts receivable to get cash advance immediately instead of waiting for 30 or even 90 days to receive your money. The cash advance is usually a percentage of around 70% or 80%, and the rest is forwarded to you once your customer pays in full—minus the financing company’s fees for giving you the cash advance.

Another method of account receivable financing is by selling your accounts receivable outright. You may deal with a professional debt collection agency for this, especially when the payment is way past due.

So the question remains: account receivable financing—good idea or not? Regardless of the exact method you use to receive funding through your accounts receivable, there are some common factors which should help you decide.

The Advantages of Account Receivable Financing

There are quite a few here that worthwhile to mention.

1. The chances of getting the financing are quite good. Getting a bank loan is always a very risky proposition, but with your accounts receivable working as collateral then you definitely boost your chances and options.
2. It’s a very quick process. Even the slowest lenders may take only two weeks to get you your money. Some even have it ready inside a week.
3. You don’t need a great credit rating. That’s actually irrelevant, because it’s not your ability to pay that’s being questioned here. It’s your customer’s ability and willingness to pay what they owe which is important.
4. You can use the lender to act as your own invoice processing department and payment collection agency. That frees you up from setting up a department of your own.

The Disadvantages

Here are several classic objections to accounts receivable financing:

1. The fees may be too high.
2. The advance may not be sufficient for your needs.
3. You may be locked in a contract that’s too long.

This may all be true, but not necessarily so. That’s because the accounts receivable financing industry has become quite competitive, and now many players are offering very attractive rates. You may be able to negotiate a lower fee and a higher advance, and you may even place a limit on how long the arrangement will last.

Conclusion

Assessing the answer to the “account receivable financing good idea or bad” conundrum is ultimately your responsibility. Most financial experts will tell you that your first option should always be your bank. If you can swing a loan from your bank, then your worries should be assuaged.

For the most part, that’s true. But getting a loan from the bank is easier said than done. There’s still a very good chance that you won’t get the money you need, and it may take a very long time even if you don’t get the loan.

So if you are faced with the prospect of closing shop because you can’t pay your suppliers and your employees, then you know very well that account receivable financing is the better choice.