Accounts Receivable Financing is gaining immense popularity in the business sector, especially among small business owners. AR financiers are who business owners turn to when their working capital is not enough to keep the business rolling, when traditional loans and lines of credit are not available.
What is Accounts Receivable Financing?
Accounts Receivable Financing is simply an asset financing arrangement where businesses use their outstanding AR as collateral or sell it at a discount to specialized factoring or finance firms. In return the finance company will provide the concerned business with an immediate influx of money.
Advantages of AR Financing
- Immediate Cash– The greatest benefit, account receivable management businesses state is the fact that you get the required amount quickly, generally within 5-10 days, sometimes even lesser. You can then use the money to make payments as required.
- Free up Working Capital– Your working capital can be diverted to more pressing areas like inventory and salary. You won’t have to worry about enough money to buy inventory and to make other important payments.
- Save Time and Resources– Accounts Receivable financing can save time spent and staff allocated to hound clients to make payments immediately when you are short of cash. You can leave your account receivable management team to work on it.
- Retain Ownership of Business– If you choose to use this financing option, you will not have to sell equity in your business to raise capital, which means you can retain full ownership of your business.
Disadvantages of AR Financing
- Social Stigma– There is still a lot of stigma attached to accounts receivable financing, mostly because this is not a long standing financing option like bank loans. Using this mode of financing is often viewed as “the last resort”, signalling that your business is struggling. This can damage the reputation of your business most account receivable management companies claim.
- Cost– Using accounts receivable financing can work out to be quite costly as the factoring companies are known to keep up to 4% of the receivable received as their fee. In addition to this, they also charge interest on the cash advance.
- Amount is Fixed Based on the Client’s Credit– AR financing depends not on your credit history but that of the client. Since any business owner can have clients with good and bad credit histories, it can affect the amount and the discount rate you get on your outstanding receivables.
- Pay More if Client Fails to Pay– Factoring companies are not AR collection agencies, as a result if your client fails to pay, you will be required to bear the costs. You might also have to get a account receivable management company involved. So check up on your client’s credit history before stepping into a AR financing contract.
Accounts receivable financing is a great option if you need money desperately and quickly, but as mentioned above, it has its pros and cons. Research your options and if this works for you, have a go.