Late-paying clients, slow seasons, unexpected expenses, and many other factors can lead businesses to seek out short-term funding options. One of those options is accounts receivable financing, which this article covers. By the end of the article, you’ll have a better idea of how and when to use this financing method.
How It Works
Accounts receivable financing transactions are set up as a loan or an asset sale, according to Susan Payton at Small Business Trends. (Accounts receivable are unpaid invoices: A customer has received a product or service, but has yet to pay for it.)
In the case of an asset sale, which is more common, the accounts receivable are the assets. This setup involves the financier buying the accounts receivable for a large portion of their value. Then, the financier becomes responsible for collecting the debt. Once the full amount is collected, the financier sends the remaining portion of the invoice’s value to the company, minus a fee. In the case of a loan setup, the accounts receivable serve as collateral to secure financing.
Regardless of the setup, accounts receivable financing offers several attractive benefits. For instance, compared to a traditional loan, the application and approval process is much quicker. Accounts receivable financing if often particularly attractive to new businesses or those experiencing temporary setbacks: Its credit-history requirements can be much less strict than those of other financing options.
Using Accounts Receivable Financing Well
Keep in mind that while accounts receivable financing is a great short-term solution, you should still consider whether your cash-flow issues are temporary or if there is a larger problem that need to be fixed. But if the problem is indeed relatively small and short-term, then accounts receivable financing can let your business keep rolling without a hiccup. You can also use the funds to stabilize matters while you strategize to avoid similar slumps in the future.
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