Following the latest trends, it can possibly be noted that traditional and mainstream micro-business financing such as credit and business loans are insufficient or not within the range for small business owners. However, small business owners still realize the requirement to acquire financing to grow their small businesses and scale down cash flow deficiencies. It is at such difficult times that most of the small business owners turn to accounts receivable financing as a funding solution to acquire the cash.
The advantages of accounts receivable financing for small businesses can be too difficult to face up to. It is trap of getting quick financing to support business growth is a prevailing solution. Let’s have a closer look at all the imperative issues that every small business owner should look for before signing the accounts receivable financing contract.
What is Accounts Receivable Financing?
Typically known as factoring, accounts receivable financing is absolutely one of the oldest types of business financing. In simple terms, it is process that entails the selling of receivables or unpaid invoices at a markdown to a dedicated factoring or finance small business (normally known as “the factor”). The factoring firm assumes the risks on the receivable and in return provide your business with a quick influx of cash. The amount value issued on the receivable largely depends on at the maturity and quality of the receivable.
Is A/R Financing A Loan Or A Factoring Arrangement?
Before going any further, you need to make sure that it is a factoring settlement and not a loan. Make certain that the deal has a prime rate, which is basically the variant interest rate. Additionally you need to find out how the prime rate is measured and whether it is tied on the factoring. Consider that the prime rate is an essential part of accounts receivable financing.
This is another critical part of the invoice factoring settlement which you need to put into perspective. In some cases, purchases are payable within 180 days. The factoring firm is normally in charge of collecting invoice payment on your accounts receivable. It is essential to know the reserve amount and the way it is charged. A reserve amount is the cash held and it generally ranges from 2-20%.
Terms of the Agreement
Accounts receivable financing term is one essential aspect that you need to consider. Whether the agreement goes for months, a year or several years, make sure that you’re well-aware about the terms of the agreement, and whether a short-term or long-term agreement will be essential to your small business.
Accounts Receivable Financing Pros
Actually, every business financing option has its own pros and cons. Accounts receivable financing is no exception:
No Collateral Requirement: Accounts receivable financing is a type of unsecured financing that does not ask you to provide any collateral in form of assets and guarantors.
Hold Possession of Your Business: This type of financing does not require you to give out a part of your business possession so as to acquire funding.
Account Receivable Financing Cons
Higher Costs: As it is a fastest way of getting access to funding for your business, it may come at higher costs than the rates charged on other types of business loans. Consider the fact that failure to repay the amount in the predetermined time will only increase the whole amount that you may be required to pay.
Lengthy Contracts: Some of the agreements can be short term and promising; however others can be long and meandering than you would like. It’s way important to negotiate the term of the contract that flawlessly works for your small business.
Business of any type will at one point need business credit to help various daily operations. At a point, the small business may additionally require short cash to fuel its operations. Unluckily, credit access has turn out to be so tight, mainly to small businesses with many banks and credit unions reluctant to offer viable assistance. Accounts receivable financing can help businesses to remove those financial hurdles.