If you are considering the use of accounts receivable financing for your company, there are several things you should know. Small businesses may run into difficulty securing lines of credit and loans that provide the needed capital when there is a shortage of cash flow. This may lead to the realization that other financing might fit your businesses needs. But before you decide to move forward with this, there are a few things to be aware of.
If your business needs money quickly, accounts receivable financing can be an excellent option. Rather than getting money from your customers, you can receive the money you need from financing. It usually comes quickly with cash in your pocket in no more than a week and sometimes only a day. Most other loans aren’t going to offer that so it’s a pretty huge advantage.
You will also find that this type of financing helps you free up your working capital. When most of your money is tied up in inventory, this can be a huge relief. The money you get from financing can go to advertising, hiring employees, buying equipment, and more. The sky is the limit as you can choose what the money goes to and how to split it up.
However, there are some moments when accounts receivable financing may not be the right option. Rather than being judged on the credit of your business, your loan will be based on the credit of your clients. Everyone has both good and bad clients, but some businesses have more of the negative than the positive. If that’s the case, you may not receive the loan, or you may only be offered part of the amount you need.
Another area where this type of loan can go wrong is in terms of control of your business. When you choose this option, it’s entirely possible you will have to change specific things about how you do business. The factoring company offering financing might ask you to stop working with certain customers based on their subpar credit rating.
Every company needs credit to support their payroll, keep inventory, and operate daily. There are also always moments when money is needed fast. If traditional options aren’t working for you, accounts receivable financing might be a great option. However, before you decide to run out and get this kind of load, make sure you understand the many pros and cons associated with it.