If your business has a short-term need for financing, for example, to cover seasonal needs or to take advantage of a business opportunity, then obtaining a loan based on your accounts receivables could work for you.
How Does Accounts Receivable Financing Work?
If you have unpaid invoices, you can use these as collateral for financing. The lender will advance you between 80% and 100% of the value of the invoices. You can use this money for any business need that you have. In the meantime, the lender will charge you a fee each week for any invoices that have not yet been paid. When the customer pays the invoice, the lender will deduct the fees and the money that was lent to you and will then give you the money that is left, if any. If the customer never pays, you will be responsible for paying back the lender.
What Business Needs Does This Financing Address?
There are many situations where financing your accounts receivables could work well for your business. You may want to expand your business, cover a seasonal need, hire additional employees, meet payroll during a lean period, take advantage of a time-sensitive business opportunity, purchase additional supplies at a discount or cover cash flow needs while your customers are slow in paying their invoices. Your accounts receivables are a business asset, and you can leverage them to provide financing in any of these situations.
Advantages of Accounts Receivable Financing
Some of the advantages of this type of financing are:
- You don’t have to have excellent credit. The creditworthiness of your customers is more important than your own credit.
- Funding is quick, and it is easy to apply. The whole process can be done within a couple of days.
- You only need to apply once, and you can keep financing your invoices without reapplying again.
- You can free up cash right away without waiting until your customers pay their invoices.
Disadvantages of Accounts Receivable Financing
There are a few disadvantages as well:
- This type of financing is more expensive than a traditional loan or line of credit.
- You are responsible if your customers do not pay the invoices.
- Your customers might have to pay the lender instead of paying you, and this could cause some confusion for them.
Financing based on your accounts receivables could be just the solution your business is looking for. Be sure to consider the pros and cons before you decide whether it is right for you.