Every business needs capital to grow, but funds are often tied up in daily operations. Since it would be detrimental to pull those necessary funds, you have to find other options, the most common of which is commercial financing. However, not all enterprises can qualify for loans, especially if they rely on payment after delivery of goods and services. Fortunately, accounts receivable financing is specifically designed with these businesses in mind.
How It Works
Your accounts receivable are a risk on their own; you don’t know if the invoices will be paid or if you’ll be forced to take a loss. Financing them, however, turns them into an asset.
Alternative lenders can give you an advance based on invoices’ value. That way, you get the funds immediately to put toward expenses. Of course, since this is a loan, you must pay back the advance as payments come in from customers.
How You Can Benefit
First and foremost, you get immediate and dependable funding. This can alleviate budget pressures and even provide you with capital to expand.
Second, this is a great option for companies that struggle to obtain other kinds of financing. This is because lenders are more interested in your customers’ credit history than your company’s. Even if you have unfavorable marks on your credit history, you may still qualify.
Third, this is an ongoing arrangement, which means you only have to go through the application process once. After you’ve established a relationship with a lender, you can continuously borrow as per your agreement.
What To Watch Out For
Of course, as with anything, there are downsides. Whether they outweigh the benefits depends on your situation, but it’s important to take them under serious consideration.
One con is that lenders typically charge a fee. This means you won’t get the full value of your invoices as they’re paid.
Another issue is that even if customers default on payments, you still owe. You’ll have to find a way to repay the loan on time or risk penalties.
How To Tell If It Will Work for Your Business
So how do you know if accounts receivable financing is right for you? If your business has cash flow problems, but you don’t want or aren’t able to apply for a commercial line of credit, then this financing may be a valuable resource. This option may also be cheaper than turning to credit cards to take advantage of business opportunities.