The Pros and Cons of Accounts Receivable Financing
When running a business, having a positive cash flow means you can pay the bills. However, there are times when incoming funds may not match the pace of money out. Shortfalls may arise and necessitate a business owner to consider taking out a loan. There are many options available, and depending on your current situation, one such candidate may be accounts receivable financing. Is it a good fit for your current financial position? Before committing to anything, it is best to know more about it.
Accounts Receivable Financing – What Is It?
If you are a business that invoices customers, giving them a window of time to pay, you have what is known as an accounts receivable practice. There are times throughout the year when business is slower, or the need for on-hand cash to make large purchases is higher. You may need to replace equipment or stock up on inventory before a rush. In these cases, you may want to look into getting an advance on your outstanding invoices.
Accounts receivable financing is just that: an advance. A finance company will take a look at the money your business has tied up in customer invoices. They will then offer to purchase those invoices at a reduced rate, say 80 percent. They give you the cash almost immediately and start collecting directly from customers. You get fast cash, and they turn a profit.
Pros and Cons of Accounts Receivable Financing
Taking out any loan may ding your credit, but in the case of a cash advance on your receivables, it won’t have the same effect. Because the third-party finance company is purchasing your invoices, it is not considered a loan. Therefore, one pro for this type of arrangement is it will not affect your credit score.
Another positive towards financing this way is the short application and approval process. If you are in a bind, getting a decent amount of cash on short notice may seem impossible. This is not the case with these types of financing companies.
The good of the practice also comes with one major drawback. The fees charged by finance companies that practice this are usually much higher than regular lenders. Therefore, you may only want to consider going this route if you are experiencing a very temporary shortfall of cash. This type of cash advance may not solve your problems long term.
Every business experiences periods of negative cash flow or a temporary shortfall. While accounts receivable financing is a convenient and easy way to get the money you need fast, it may not work for every business or every circumstance.