Why Accounts Receivable Financing is a Better Solution than Bank Loans
Have you considered the benefits of accounts receivable financing for your business? If you’re a small business owner, you may be very familiar with the difficulty of coming up with a steady stream of working capital. This consistent flow of cash is very valuable if you’re hoping to finance business growth. Unfortunately, small businesses often face difficulties just paying the bills and when this happens traditional financing options, such as obtaining bank loans may not be a possibility.
What Is Accounts Receivable Financing?
Before you can decide whether accounts receivable financing is appropriate for your business, you’ll have to understand what this solution consists of. In fact, this type of financing has been around for hundreds of years. The structure consists of a business that sells its outstanding invoices at a discount and, in return, the specialized financing company assumes the risks associated with those invoices, such as seeking payment for negligent clients. The small business receives an immediate lump sum for the worth of the outstanding invoices, minus a small percentage or fee amount.
There are several important benefits to working through a financing company that offers the financing solution. Of course, there’s the quick access to the cash you need to continue paying bills, purchasing inventory, making payroll, and maintaining your facility. When customers are slow to pay their bills, this option makes up the difference.
Access to Inventory-Linked Capital
A second benefit is that your capital is then freed from your inventory. If your business relies on the sale of goods, it’s likely that most of your capital will be tied up in the warehouse. Unfortunately, inventory is sometimes slow to move, and this often means that your cash flow will slow to a trickle. With access to cash, you don’t have to sacrifice inventory to pay for business growth or pay your employees during a business slump.
A Solution When Bank Loans Aren’t Available
Another important benefit is that this is a financing option that you can turn to when you don’t qualify for bank loans. Unfortunately, small business owners often find that they don’t qualify for the funds they need through traditional routes. This type of financing allows business owners to retain control and ownership of their business even when cash flow is low.
Twice the Benefits
Trading ownership of accounts receivable is a double-edged benefit. On the one side, you get quick access to the funds you need. On the other side, you also have more time to focus on the core responsibilities for your business. The financing company that provided you with the necessary cash assumes the responsibility for following up with customers who haven’t paid.