Your Guide To Accounts Receivable Financing

As everyone knows, the COVID experience has wreaked havoc on many small businesses. The stresses of a pandemic-induced lackluster economy have made viable business activity a difficult proposition for many. In some cases, working capital has simply dried up. Even with massive government intervention, some businesses still need help.

Even if your business is relatively healthy, it may become subject to seasonal low periods. In times like these, alternative funding may be needed as well.

Accounts receivable financing is is a form of alternative financing that you may wish to consider when your business needs a quick addition of working capital. Also known as AR financing, your funds generally arrive quickly and conveniently so that you can help meet the short- and intermediate-term needs of your business operations. Like all financing options, account receivable financing has both pros and cons. Here are some of the particulars.

Accounts Receivable Financing In a Nutshell

Account Receivable financing can be summarized as follows:

  • You apply for funding for one or more of your businesses that has accounts receivable.
  • The financing company reviews the value of your outstanding invoices and other particulars of your business.
  • Once approved, the financing company sends you the working capital as a lump sum.
  • You can use the money as you see fit: for debt reduction, expansion, new business lines, inventory, etc.
  • You repay the financing agent incrementally until the lump sum is repaid in full. 

The quick infusion of cash will be great for your operations. You’ll be able to meet payroll, buy inventory, pay taxes, consolidate loans, or a host of other needed activities.

The amount you can obtain depends on the financing company. In some cases, your funding is capped at 70% of the value of your receivables. On the other hand, a different agent may permit you to obtain up to 100% of your receivables. Also, different lenders can provide different levels of funding, such as from less than $50,000 to $1 million or more. 

With this type of financing, your outstanding invoices are under your control: It is still your responsibility to collect payments as those invoices come due. That’s different from a similar type of financing known as accounts receivable factoring. 

Summary

AR financing is worth considering if you’re interested in getting working capital for your business fast and you don’t have perfect credit. It is important to weigh the benefits of AR financing against the total cost of financing to decide if it’s a good option for your particular business situation. 

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