Does your small business need working capital; however your customers will not pay until later? Did the bank just reject you a business loan? The accounts receivable financing is a solution for your small business to cover the cash flow issues. With accounts receivable financing you can turn your unpaid invoices into cash immediately.
Additionally, it is the only funding type that truly grows with the sales. That means, the more business equals more invoices.
Three Primary Types Of Receivable Financing
- Asset Based Lending
Asset based loans are completely based on assets, typically accounts receivable and inventory that in this setting can be used as collateral. You are putting your potential revenue at risk to get instant access to cash. Asset based lenders will offer you funding based on a set percentage of the secured assets’ value. The percentage is commonly 70-80% of eligible receivables and 50% of completed inventory.
- Traditional Factoring
This type of factoring is also called non-recourse factoring and is also available for both import/export and domestic situations, and offers your small business with the outsourced credit and collection services as well as optional funding. Many small businesses need more cash flow to cover seasonal demands, expansion, and more. Traditional factoring is one of the oldest types of business financing that is used by many large businesses, and is an option that provides extended protection from credit risk of your approved customer or account debtor.
- Selective Receivables Financing
This type of financing helps you to improve working capital and successfully manage balance-sheet risk through the purchase of export and domestic trade receivable on a non-recourse basis. This product is especially designed to fund single or small batches of invoices regarding a small number of credit-approved debtors.
How To Get Funding On Your Receivables?
In the past, it was common for small businesses to use banks for all of their financial requirements. But, as the economy changes, it is clear that there’s a need for small businesses to have multiple ways to fulfill their borrowing necessities.
Banks put the risk on business owners by giving cash in exchange for valuable collateral. On the other hand, a cost-effective alternative is invoice factoring or accounts receivable financing. To use services that can help you borrow cash on your receivables, all you want is an unpaid invoice.
Accounts Receivable Financing Can Fix Your Cash Flow Issues
Whether you provide a service or a product, you have to wait for your clients to pay their bills. Even as you wait for the payment to clear, you may lose an opportunity to invest working capital or extend credit to your clients. On the other hand, when you have access to a majority of that cash instantly, your potential to develop your small business becomes quite easy.
As opposed to waiting through the process of having your property appraised by the bank, you can have a line of credit extended to you based on any of your unpaid invoices. This way, slow-paying customers are not an issue and you can pay your workers, cover operational costs, purchase new stock, pay for unexpected fees and clear up other problems.
Accounts Receivable Financing & Business Loan Comparison
Accounts receivable financing helps small businesses to develop and fulfill their cash flow requirements. In case you have the financial inability to acquire a traditional funding or are considered non-bankable, invoice factoring provides you the required working capital. In many instances, traditional funding is not possible for small businesses or the loan approval process takes an uncomfortably long period.
The factoring method allows for as much as 90% of the accounts receivable amount the day the product and service is completed. Invoice factoring is an easy process; you get instant cash when you need it most to run your small business appropriately. This kind of funding provides you with the short, flexible funding when you actually require it.
How Do Factoring Firms Provide Account Receivable Financing?
In case you have an invoice that has gone unpaid for a long time, you may be losing cash in some unexpected ways. For instance, other payments that you need to pay may have some late fees. In other words, sometimes it is way better to lose a small percentage on your unpaid invoices than pay large amounts as time goes on. This is the concept that makes financing factoring businesses attractive. In some cases, a small business with an unpaid invoice can acquire up to 97% of the original amount.