Accounts Receivable Funding – How it Works

by admin on Aug.19, 2010, under Business, Legal and Financial, Real Estate

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If you own a small business, you may find yourself struggling to gain all the necessary capital to make your business grow. In fact, many small business owners are facing cash flow issues that are keeping them from growing to their full potential. Sometimes, financing from other sources, such as bank loans or lines of credit, may not be sufficient or available for them. Accounts receivable financing could be an option worth exploring.

Account receivable financing, also called factoring, consists of selling your outstanding invoices at a discount to an external company that will take the risk on these receivables and give you immediate cash payment. The actual amount that you will receive will vary depending on the age of the debt. The more current the invoice is, the more you will typically get.

Accounts receivable factoring has many benefits, such as:

Getting rapid financing. Unlike some other types of financing, you would not need to file a business plan or send in your tax statements to qualify for accounts receivable financing. You will receive quick cash that can be quite useful if you are facing cash flow issues.

Passing off your collections to another company. You will no longer have to spend time and money collecting on invoices. This will let you use your resources in a better way, that are more productive in helping your company grow.

While using accounts receivable factoring can have some great benefits for your business, it is not without its drawbacks. The main disadvantage of accounts receivable financing is the costs involved. The minimum fee that you will be charged by the financing company is 5%. Older invoices could be discounted by as much as 25%. Those fees can add up to a lot of money in the long term and are definitely more expensive than other means of financing. You should know that the discount rates will vary depending on which company you deal with, therefore it is in your best interest to shop around before you make a decision to secure financing.