AR financing

Small business owners face a constant struggle of attaining capital to finance the growth of their business or meet cash flow shortages. When regular small business financing such as loans and credit are limited, some business owners will then turn to accounts receivable financing. But the biggest question may be is accounts receivable financing right for your business?

Accounts receivable financing is defined as the selling of outstanding invoices or receivables at a discount to a finance or factoring company that then assumes the risk on the receivables and provides quick cash to your business. It is important to keep in mind that the amount of value assigned to the account depends on the age of a receivable. For example: a more current invoice will pay more than one that is older. Also business owners should understand that any accounts receivable over 90 days typically are not financed. Accounts receivable financing may also be known as accounts receivable factoring or accounts receivable funding.

Small to mid-size companies can benefit substantially from the ability to quickly and economically turn their Accounts Receivable into cash or working capital.Accounts Receivable financing is based on business and personal credit scores.It is important to realize that you must have your personal and business finances in order to subscribe to a Accounts Receivable Financing Program.

There are several benefits to Accounts Receivable Financing.Some of these are:

• The business can pass off collections.Outsourcing your accounts receivable management to another company can then free up your resources to focus on other more productive activities such as selling.


• You can free up working capital. Many businesses have the majority of capital tied up in their inventory. Accounts receivable funding can allow a company to free up capital tied up in inventory to be used for other reasons.


• It is a source of quick financing.It is important to note that Accounts receivable factoring will not require a business plan or tax statements. This is a quick form of cash often used for businesses that are experiencing a cash crunch.

While these are some of the benefits to factoring your accounts receivable, business owners should also understand that there are potential drawbacks to using this method to finance your small business. One of the biggest downsides to accounts receivable financing is the cost. While a 5% discount fee and other charges might not seem high this month, over the course of a year the costs can greatly exceed the interest on bank credit or a loan. Rates can vary widely among companies so it is crucial to shop for the best deal and contract.

Business owners who are considering this method of financing for their small business should consider the following questions:

• Is the money needed necessary for the businesses survival, or moreover to take advantage of an opportunity?


• Does this financing strategy match with your business plan? If you have no business plan it is crucial to put together a plan prior to taking on additional money.


• Is your small business ready for more money and expansion?


• As the business owner have you explored all possible sources of small business financing?


• What are the current economic and industry conditions in your area? Is this a favorable time to finance?

While taking the accounts receivable funding plunge can be the difference between company survival and bankruptcy savvy business owners will carefully consider all options. It is important to keep in mind that the factoring industry is not as regulated as banking. You should spend the necessary time to investigate the companies you are considering working with. Also be sure to inspect contracts and negotiate discount rates. The bottom line is that using accounts receivable financing can buy time to eventually qualify for a regular credit line from your bank.