Access to capital can be a issue for businesses that rely on delayed payments. If your business structure allows customers to make their payment 30 or more days after receiving products and services, your cashflow can be negatively affected. Unlike businesses that receive payment upon delivery, you may not be able to accurately plan your spending, as you don’t know when, or even if, you’ll receive the owed funds. This financial uncertainty can take a toll on your business’s growth and ability to fulfill commitments. Fortunately, accounts receivable financing can help you turn a liability into a valuable resource.
How Does It Work?
Unpaid bills owed by customers are tracked as accounts receivables, which your business then has to collect. This means your business must deal with risk whenever you provide your goods or services, since you can’t know that you’ll be properly compensated for your time, effort and materials. This makes loss a very real possibility, which can be particularly detrimental if you’re a smaller company.
You can think of accounts receivable financing as selling or outsourcing your accounts receivables. You enter into an agreement with a financing company to exchange your accounts receivables for cash. The financial company calculates the cash amount as a percentage of the amount owed by your customer, and determines the percentage based on how likely the customer is to pay in full. Once the bill is paid, you receive the remaining difference between the initial cash payment and the total bill amount, minus a service fee charged by the financing company.
What Are the Benefits?
One of the biggest benefits to accounts receivable financing can be the immediate access to funds. This can help you better manage your budget and give you access to more capital at once. With quicker cash, you can apply funds to the areas of your business which need them the most. You’ll also be able to manage your own debts more easily, as you won’t necessarily be relying on promises of future payment when you have suppliers who need to be paid today.
Another huge advantage can be the lower risk. When financing companies agree to collect on the accounts receivables, they also take on the risk of loss. You, on the other hand, will still have that initial cash payment available whether or not the customer pays.
Accounts receivables may seem like a liability, but they can actually be a great asset to your company. With account receivable financing, you can boost your access to capital without the burden of a loan.