Most businesses, regardless of the size, do sell goods, products, and services on credit. Since the sale has been done, these pending invoices are assets to the concerned company. With accounts receivable financing, it is possible to sell these invoices to a factoring company, which gives a major chunk of the total amount as a loan.
The factoring company takes a charge for the services and gets paid when the invoices are due. The pending amount of the total invoices will be received by the parent company when all other payments are cleared by the debtors. Accounts receivable financing allows businesses to get working capital and induce cash flow when they need it the most. Here are some of the things you need to know.
How does it work?
If you are a small business owner in need of immediate cash, you need to first find a reliable factoring company. You can check for accounts receivable financing with Interstate Capital among other options. The next step is to submit the invoice(s) to the concerned factoring service, and they will do what it takes to complete the verification process. Once all things are checked, the factoring company will pay a part of the invoice, which can be as much as 80% of the total invoice amount. On the due dates, the factoring company will collect the invoice from your customer, and the rest of the balance will be paid.
What are the pros and cons?
Thanks to accounts receivable financing, you don’t really need to wait to get paid for your invoices. Also, this kind of lending doesn’t impact your balance, as you are not pledging your assets. To be more precise, this is not like an additional loan. You can get money when you need the most – An advantage for new and growing businesses. On the flip side, you cannot deny your liability to the factoring company if the customers don’t pay on time. Also, do check the overall charge of the factoring service, which isn’t very less in most cases. Since you will lose a small part of your invoices, it may impact your profit margins.
Nevertheless, accounts receivable financing is much better than traditional lending, because your business doesn’t have to deal with additional interest payments and loans. Just do your research for selecting the factoring company, so that the terms and conditions of their services are clear and transparent.