The Benefits of Accounts Receivable Financing
All companies experience slumps during certain times of the year. This can be because the product sold is seasonal, such as swimming pools or snowblowers. It may also be caused by changes in technology or the market, and the company needs to catch back up. Whatever the reason, accounts receivable financing can be a great way to obtain funds during slow periods.
Also known as factoring, accounts receivable financing involves selling invoices to a third party at a reduced rate. The third party analyzes the invoices and checks each customer’s credit history to ensure the risk is good. Once approved, the third-party financing company processes the transaction.
Because accounts receivable invoices are considered an asset, the process happens quickly. Once the sale has been approved, the company should receive the money within a few days, and in some cases, as little as one day. This can be a huge help, especially if many of the invoices contain payment terms that stretch out for months.
Another benefit is that the company can select which invoices to sell. It is not necessary to put all the invoices up for sale, especially if the amount of necessary cash is small or the slump will be ending soon. This flexibility allows the company to retain control of its finances and only sell enough invoices to get as much money as it needs.
Some loans have restrictions in place regarding how the money can be spent. Since this financing option involves selling assets and is not a loan, companies can do whatever they want with the money, whether they need to purchase equipment or pay staff members.
The company should be prepared to provide the necessary documentation when making the request. The age, value and number of invoices being offered will be scrutinized and evaluated for risk. If the invoices are all for customers with a poor repayment history or have gone a long time without a payment effort, the financing company may decline to accept the risk or raise its fees.
There are many options available when a company finds itself in need of funds. Traditional loans often take a long time before being approved and may have restrictions in place. If the need is immediate and a short-term solution is required, then accounts receivable financing could be the right solution. This can allow a company to weather any slumps without laying off staff members or closing its doors.