Ideal Business Consultants

Accounts receivables financing is a type of funding source where a company sells its outstanding receivables or invoices to a factoring firm at a discount. In turn, the factoring firm will assume responsibility on the receivables, which includes collecting payment in full on the unsettled invoices. The amount that the original owner of the receivables will receive largely depends on the age of the invoice. Typically, a more current receivable will have a higher price, while invoices that are more than 90 days are usually not financed.

Among the best features of account receivables financing is that a business does not have to possess a high credit rating in order for it to qualify for such funding source. Even if you are just a young company, struggling to take your place among other businesses and still without a solid track record, you can definitely avail of this type of funding source, as long as you receive term payments from customers. In fact, even if your company has been though a Chapter 11 bankruptcy, you can still benefit from account receivables financing.

The 3 Major Advantages of Account Receivables Financing

• You can Free up Working Capital

A lot of companies have a large chunk of their capital tied up in outstanding invoices. You will be able to free up this capital by converting your outstanding invoices to cash through account receivables financing.

• Gain Access to Quick Financing

When availing of accounts receivables factoring, you need not furnish heaps of documents, which include your tax statements or business plan. All you need to have are your customers’ outstanding invoices.

• Pass off your Collections

Outsourcing the management of your account receivable to another company will enable you to focus on the more important aspects of your business. At the same time, you get to save on valuable resources such as time and manpower that you would have used when collecting payments on outstanding invoices.

As in most cases, whenever there are advantages, there will always be disadvantages. The main disadvantage of account receivables financing is that you may have to shoulder up to 5% in discount fees, as well as other charges that the factoring firm is going to charge. While this might not seem so high during the current month, the accumulated cost from discounts may exceed that of a bank loan.

Another drawback is that you will lose control over your collections process as it will be the factoring firm that will take charge of collecting payments on outstanding invoices. Depending on how the factoring firm will go about their collection process, such situation can potentially have an impact on your relationship with your customers.

In view of such circumstances, it is very essential to ponder over a number of questions before availing of this type of funding. Some of the questions that you should be asking yourself are:

• Is the needed funding crucial for the survival of your company or a very essential aspect in taking advantage of a business opportunity?
• Were you able to study and examine other possible sources of financing?
• Is account receivable financing part of your original and overall financial strategy towards the attainment of a much greater goal?
• Is your company all set for an expansion?
• Is the current economic condition a favorable time for your company to avail of account receivables financing?

If one or more questions applies to your company and you answered in the positive, then account receivables financing may be for you. Nevertheless, it is still very important to consider all aspects and to exhaust all options before settling for this type of financing. This does not mean that account receivables financing is bad for your company, however, it must be regarded as a last resort when every other type of financing becomes unsuitable for your company. On the brighter side, account receivables financing can be used to buy time and ultimately qualify for a regular loan from a bank.

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