Normally called invoice factoring, accounts receivable financing is actually one of the oldest types of business financing solution. In other words, it is a method that involves selling of the receivables or outstanding invoices at a discount to a specialized factoring company, normally called “factor”. The factoring company considers the risks connected to the receivable and in turn provide your small business with quick cash. The amount provided on the receivable mostly depends on the term and value of the receivable.
What is Purchase Date?
The purchase date is another important component of agreement that you need to consider. In general, the purchases are payable normally within 180 days. The factoring firm is responsible of collecting and invoice payment on your ARs. It is way important to understand the reserve amount and the way it is charged. A reserve amount is the cash held and it usually ranges from 2-20%.
What Are The Terms Of Agreement?
Agreement term is one of the important factors that you have to consider. No matter how long the term goes, make sure that you are knowledgeable about the term of the agreement, and whether a short-term or long-term settlement will be imperative for your small business.
Is It A Loan Or A Factoring Arrangement?
It is also worth noted that it is a factoring agreement and not a loan. You also need to make sure that the factoring agreement has a prime rate, which basically is the varied interest rate. Check out how the prime rate on factoring agreement is calculated and whether it is attached to the factoring. Take into account that a prime rate is a vital part of accounts receivable financing, whether in minimum or maximum.
What Are The Pros of Accounts Receivable Financing?
As a matter of fact, every business financing option has its advantages and disadvantages and so is the accounts receivable financing.
No Collateral Requirement
Accounts receivable financing is an unsecured type of business financing and doesn’t ask you to provide collateral in the form of asset/resources and guarantors.
Keep Hold Of Ownership Of Your Business
Accounts receivable financing does not require you to hand out a fraction of your business ownership as a way to acquire funding.
What Are The Cons of Account Receivable Financing?
Higher Rates – As it is a quick source of accessing funding for your small business, it may come at higher rates as compared to the rates charged on other types of business financing programs. Keep in mind that failure to pay back the amount within the preset period will only add to the entire amount that you will need to pay.
Long-Term Contracts – Some factoring agreements can be short and feasible; however others can be lengthy than you would like. However, it is way important for you to negotiate the length of the agreement that perfectly matches your business condition.
For just about any type of business, no matter small or large, at some point will need business credit to support various daily operations of the business. At some point, the business may additionally need quick cash to run its operations smoothly. Unfortunately, getting funding especially for a small business from a traditional source is almost impossible. Possibly, the accounts receivable financing can help small businesses overcome those financial obstacles.