With banks not exactly in a generous mood when it comes to financing new companies, many startups and small businesses have turned to alternative ways of boosting cash flow. But of all alternative financing methods available, accounts receivable or AR financing has become one of the more viable means of acquiring funds.
There are several types of AR financing. But the premise remains the same. You use your accounts receivable to get an advance on the money owed to you, so that you can use that money immediately instead of having to wait months for you to get paid by your customer.
The benefits of AR factoring are numerous and substantial:
- You don’t need excellent credit. In fact, your credit score is irrelevant.
What’s relevant is the credit history of your customers from whom the money will eventually come. If they have an excellent record of paying invoices fully and on time, then you can get your financing request approved.
- It doesn’t take a lot of time. Asking a bank for a loan is a time-consuming procedure. You have to wait weeks, which can be frustrating since the loan application often ends in a rejection. But with AR factoring, the approval may be granted in as little as 24 hours. What’s more, setting up the factoring doesn’t take more than a week.
- You can use the factor’s credit department to determine the credit-worthiness of new customers. Granting credit to new customers is always an iffy proposition. You just don’t know whether or not they’ll actually pay up. But with your factor’s credit investigation, you’ll know which customers will most likely pay up on time.
- You can also use the factor to collect the payments on your behalf. You don’t have to hire your own collectors or use a third party collector. The factor collects the payments for you. They then take their fees from the payments, and then forward the rest of your money to you.
For example, let’s say that your factor gives you 80% of the value of the AR. When the customer pays in full in 30 days, you then get the rest of your money from the factor after the factor has already deducted its fees.
- Factoring boosts your cash flow for various needs. You can use the advance in any number of ways. You can use it to meet payroll, pay utility bills and office rent, or pay for supplies or inventory.
In addition, usually the factor doesn’t interfere on how you want to use the advance money you get. This is in contrast to how banks would want to know just how you want to use the loan they provide.
Some say that AR factoring can be expensive, and that’s probably true when compared to the interest rates banks collect from borrowers. But without factoring, it’s probably much more expensive not to get the financing in the first place.