Question

Accounts Receivable Financing : An alternative to bank financing for your small business

Answer 1

Accounts Receivable Financing : An alternative to bank financing for your small business

For Small business loans can be hard to get. Banks continue to tighten their lending standards to comply with government regulations and have lowered their credit limits for business owners, in many cases, shutting down small business loans altogether.

When getting a loan from the bank is not an option, small businesses should consider working with alternative lenders, such as those that offer accounts receivable financing (also known as invoice financing or factoring). Invoice financing companies typically put less emphasis on credit history and collateral since they are able to extend credit based off work that has already been completed and invoiced.

Furthermore, small businesses can benefit from financing their invoices versus getting a loan.

Accounts receivable (AR) financing is a type of financing arrangement in which a company receives financing capital related to a portion of its accounts receivable. Accounts receivable financing agreements can be structured in multiple ways usually with the basis as either an asset sale or a loan.

• Accounts receivable financing provides financing capital in relation to a portion of a company’s accounts receivable.
• Accounts receivable financing deals are usually structured as either asset sales or loans.
• Many accounts receivable financing companies link directly with a company’s accounts receivable records to provide fast and easy capital for accounts receivable balances.

Accounts receivables are a business asset: They represent the money your customers owe your small business. They also can be used to get financing for your small business. Your business will get cash up front for part of the value of the accounts receivables, even before your customers pay their invoices.

There are two main kinds of financing you can get based on your accounts receivables — factoring and straight financing.

In accounts receivable factoring, a finance company, called a factor, buys your accounts receivables outright for part of what they are worth. Your business gets part of that in cash upfront, and another, smaller, portion when your customer pays the invoice. The factor company gets to collect the money your customer owed you, hoping to get paid 100% of the invoice.

Or, with accounts receivable financing, you can borrow money against the value of one or more of your accounts receivables. This could be a lump sum loan or a line of credit. You are still responsible for billing and collecting on your accounts receivables.

Whether you sell or finance against your accounts receivable, you can get the money you are owed faster than if you wait for a customer to pay you.

Factoring your accounts receivables has been more common in some businesses, typically those that sell to other businesses. Unless you prepare your customers, whether consumers or businesses, they may see factoring as a sign that your small business is in financial trouble.

However, these financing companies may still turn away small businesses with a high debtor (your customer) concentration because the lack of diversification imposes a risk.