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Taking the Complexity out of Accounts Receivable Financing

Accounts receivable financing allows you to access funds for your business by selling your outstanding invoices at a reduced rate to a finance company. The popularity of receivables financing continues to grow among business owners who face limited options through traditional banks. Since financing options for small business owners continues to shrink, you need to ask yourself some questions about alternative loans and accounts receivable financing.

A Closer Look at Accounts Receivable Financing

In commercial finance, factoring is the process of purchasing outstanding invoices by third party finance companies. Therefore, companies that buy your outstanding invoices or advance funds on receivables go by the name ‘factoring companies’. Each factoring company that buys or advances money on an outstanding debt places a value on the receivable based on its age. If one of your customers pays their debt as agreed, the value of the receivable increases and the factoring company pays you more than older debt. Typically, factoring companies do not buy or advance money on receivables that are 90 days or older.

Factoring companies usually advance money on receivables at 75 to 80 percent of the debt value. Therefore, if you have $150,000 in accounts receivables and they are current, the factoring company will advance funds on the debt for up to $120,000 (80 percent of the receivable). However, the factoring company places the percentage value of the receivable based on the quality of the outstanding debt. For example, if Home Depot and Lowe’s are your customers, you will likely see the factoring company advance funds on your receivable for 80 percent of the value. However, if your customer is Granny’s Home Baked Cookies, you will likely see the factoring company advance funds for up to 70 to 75 percent of the receivables debt value.

Pros and Cons of Accounts Receivable Financing

Every business loan program has pros and cons. Whether you secure your loan through traditional banks or alternative financing programs, you will find good points and bad points associated with the programs. Accounts receivable financing programs are no different, they have pros and cons. Here are a few of the pros and cons that will help you decide if receivables financing is right for you, starting with the pros.

  • Accounts receivable financing gives you fast access to working capital. If your business needs immediate attention, you can put the money to work for you in as little as five business days.
  • Factoring companies do not require any collateral to secure the funds. Therefore, you never worry about losing personal or business assets.
  • Once you receive the funds you immediately free up working capital. You can put the money to work in any way you choose. Whether you need to strengthen cash flows or develop a marketing campaign, the money is at your disposal.
  • There are no minimum credit score requirements. Bad credit, no credit or slow credit qualifies for accounts receivable financing.

Here are a few cons associated with accounts receivable financing:

  • Any type of loan or cash advance costs money, and accounts receivable financing typically costs more than traditional business loans. You can expect the factoring company to keep one to four percent of the receivable as a fee. Factoring company’s also charge interest on the money, usually the prime rate plus one or two percent.
  • Contracts for accounts receivable financing last anywhere from two to three years. So if you are looking to pay off your contract in a short amount of time, that option generally is not available. However, since receivable financing continues to grow in popularity, factoring companies are starting to shorten the length of the contracts.
  • Most business owners look at accounts receivable financing as a last resort. Therefore, the program does not carry the type of credibility you might find with a traditional business loan. However, receivable financing provides you with working capital even if your credit profile is less than stellar.

Choosing the right financing for your company is one of the most important decisions you will ever make. Your business and your personal financial future are on the line with each of your financing decisions. Take the stress out of the tough choices and discover how accounts receivable financing can help you and your business.