account receivable financing – NeeBo Capital Blogs

Running a business today can be tough. Aside from keeping your head above waters against the competition, you also have to deal with the issue of having your capital tied up in accounts receivable. Fortunately, you can turn those invoices into cash to help your business meet its day-to-day needs.

The process of selling or using your accounts receivable as collateral to a third party financial company is known as factoring. In this system, you will receive 70 – 95 percent cash equivalent of your accounts receivable as you pass them on to a third party company who will then collect the money owed by your customers for a fee. Account receivable financing is a good idea, especially for a start-up business, because it opens up many opportunities.

Quick Cash

By selling your accounts receivable, you can have access to cash immediately. There’s no need for you to wait for weeks or several months just to receive money from your sales. In most cases, funds can be forwarded to your account in five to 10 days, but there are third party companies that will hand you your money within 24 hours.

Retaining Credit Rating

Having your capital replenished means that the credit standing of your company will not be in jeopardy. It can be a huge problem in the future if your business is always late in paying the bills just because your customers are taking their sweet time in delivering payment.

In the U.S., Sutherland reported that the mean past due rate as of May 2013 is 18.29 percent. That means that almost one out of your five clients will not pay on time. By selling your accounts receivable, you can make timely payments to whatever expenses your business might have incurred, ensuring that you have a gleaming record to your service providers.

Forget About Loans

With your money back in your pocket, you have the resources to carry on with operations and serve new clients without asking the bank for a loan. If you are an apparel company, factoring allows you to pay for wages, and other expenses that you may need to cover to continuously serve your customers. You no longer need to acquire a loan from the bank to keep your business moving.

Keep the Business for Yourself

If you are a start-up business, establishing a stable financial flow is crucial if you want to keep your company all to yourself. Unfortunately, some start-ups quickly look for investors to beef up their finances and facilitate growth. Factoring gives you the opportunity to do the same without dishing out a percentage of your business to total strangers just because they have the cash.

Eyes on the Prize

Since capital has been freed up and operations can move forward as usual, your attention is now directed at managing your business instead of trying to collect money from indifferent clients, making you more productive. As you are no longer anxious about receiving payment, you feel calmer in handling operations and addressing the concerns of your employees. As a result, you are putting your business in a good position to succeed.

Having a pile of accounts receivable is not healthy for you business. To get rid of those invoices, opting for account receivable financing is a good idea. It gives you access to quick cash, retains your credit score, prevents loans, keeps investors out, and lets you focus on your business. These excellent advantages more than make up for the small fee involved in the factoring process.

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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.

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.
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.
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.
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:

The fees may be too high.
The advance may not be sufficient for your needs.
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.

Tag: account receivable financing

Is Account Receivable Financing a Good Idea?

Need Working Capital? Call 1-888-382-3766 To Speak With Our Friendly Staff

Account Receivable Financing – Good Idea or Bad?