What is Accounts Receivable Financing?
Accounts receivable financing is a source of funding in which a business agrees to sell their outstanding or future receivables at a discount to a finance company. That finance company will assume the risk on the receivables and, in return, provide an approved amount of funds to the business. Instead of getting paid the full value of the invoice, the business gets an immediate cash payment by selling the rights to be paid by the business’ customers originally invoiced. The business’s customer still owes the amount due on the invoice, but now they have to pay the financing company instead of paying your business.
Pros and Cons of Accounts Receivable Financing
As a business owner, you understand the importance of having access to fast funds. No matter how big or small the need is, things always seem to pop up. So if you have an immediate need, accounts receivable financing can be a solid option. With accounts receivable financing, you can receive cash in a faster manner than your customers would pay you.
Only Pay If Paid by Your Customers
If your business ends up not selling any of your product, no receivables are created. Thus, no receivables are owed to the finance company. This can provide an advantage that a business loan cannot. With a loan, you have an obligation to pay the debt regardless of whether your business succeeds or fails.
Can Be Used for Any Business Expense
Accounts receivable funding can quickly free up working capital, so you can use it to grow your business. For example, you can purchase (and ideally sell) more inventory, make a hire that adds value and revenue to your business, use the money on marketing efforts to reach more customers, or buy equipment that will help improve your bottom line.
While immediate access to cash is sometimes a necessity for a business, it can come at a high price. As such, accounts receivables financing may come at a higher price than a business loan would.
Possible Loss of Control
While accounts receivable financing doesn’t affect the ownership of your business, you may have to give up some control of certain processes. For example, the financing company could tell you that you have to stop doing business with a particular group of customers because of poor credit.
Your Cost Is Based on Your Clients
Accounts receivable financing is unique. Instead of being judged based on your own business’s credit, your access is determined by your clients and customers. If your business’s customers have unsteady payment histories and low credit, your ability to sell these future receivables could be affected. You may also receive a lower percentage of cash up front. Poor credit or uncertain payment history might even cause you and your business to be ineligible for receivables financing.
Business Funding From The Business Backer
There are three products available through The Business Backer that can be used to cover business financing needs.
From Application to Funding in 3 Easy Steps
- Apply online.
One of our experienced Funding Advisors will call you shortly.
- Receive a decision.
Your Funding Advisor will help determine the best financing option after you submit 3 months of business bank statements.
- Receive your funds.
Sign your contract and receive funds as soon as next business day, if approved.‡