Owning a business that sends invoices to clients can present unique cash flow concerns. When people pay bills late, your company may need more working capital to cover necessary expenses. Accounts receivable financing offers a way to improve cash flow and manage costs. This method involves selling customer invoices to banks to gain access to payments quickly. However, there are a few different structures to consider when utilizing this funding.
Selective Receivables
By selecting large invoices from clients with high credit ratings, you can get competitive financing rates from financial institutions. With this arrangement, your business can choose which invoices to sell to a lender, and you can receive immediate payment. Additionally, these transactions do not affect your company’s balance sheet, meaning you do not incur debt.
Factoring
When you use traditional factoring to manage cash flow, you still sell your invoices to a third party. However, you do not receive the total amount of the payments. Typically, factoring companies pay about 80% of a customer invoice upfront, minus fees. You receive the remaining amount when the client pays their bill. Most banks offering this option charge high fees, and the deferred payment portions can affect your debt ratio.
Asset-based Funding
When you choose asset-based lending, you lose the flexibility of the other accounts receivable financing options. With this funding, you must provide assets to back the loan. You can use your accounts receivable or other property as collateral. The terms and conditions of these loans vary depending on the value of your invoices.
Cash Flow
Your organization must handle cash flow properly to stay successful. Keeping enough working capital to cover your operational expenses helps your business thrive. Companies sometimes experience revenue shortages, making paying utility bills, rent, suppliers, and employees challenging. Actively addressing cash flow hiccups can prevent your business from failing.
Planning
Creating a strategy before you are low on capital allows you to make informed financial decisions rather than quick judgments out of necessity. Ask questions to learn the details of a bank’s terms, interest rates, and fees. Consider the differences between funding types to choose the best method for your unique circumstances.
Accounts receivable financing offers a way to stabilize cash flow and avoid potential disasters. By selling your company’s unpaid invoices, you get immediate access to funds. This finance method provides an excellent way to stay on your feet while waiting for customers to settle their accounts.