Finance your business through accounts receivable

Traditional financing is not as easy to come by as it once was. Savvy small business owners are having to turn to other methods in order to secure, the financing they need, for their business. There are many methods that you can tap into; however, many small business owners are turning to using their accounts receivables to gain funding.

Using your accounts receivable, (or your customers' credit accounts), to obtain financing for your small business, is another method of raising money for working capital needs. It should be understood that both accounts receivable financing, and inventory financing, are usually used for quick, short-term loans, when it is not possible to obtain a short-term loan, from a bank or other financial institution. Both of these are used to raise working capital, or the money you use for your daily operations.

There are many different places to get this type of financing. Commercial finance companies will often offer accounts receivable financing, to small business firms. Sometimes, commercial banks or other financial institutions, will also offer accounts receivable financing. It should be understood that interest rates are usually higher on this type of financing, than on a traditional bank loan.

There are generally two methods of accounts receivable financing. These are:

• Pledging Accounts Receivable-The first thing to understand is exactly what you are putting up for financing. Pledging, or assigning, accounts receivable means that you essentially use your accounts receivable as collateral to obtain cash. The lender then has the receivables as security, but you should keep in mind that as the business owner, you are still responsible for the collection of the debts, from your credit customers. This is done when a lender looks at the aging schedule of a business firm's accounts receivables, to determine which ones to accept as collateral. It is important to know that the lender only accepts those receivables that are not overdue. This is because overdue accounts don't make good collateral. In addition, if a customer has credit terms extended to them that the lender thinks are too long, the lender may not accept those particular receivables either. After thoroughly examining a company's receivables, for overdue accounts (and terms the lender doesn't like), the lender will then determine what amount of the company's receivables they will accept. After this part of the process is done the lender will typically adjust that amount for returns and allowances. This means that the lender will decide what percentage of the value of the acceptable receivables they will loan, and make the loan to the small business. Statistics show that the percentage lenders will usually loan is around 75-85%.It is also important to understand that if the small business defaults on the loan, the lender then takes over the company's accounts receivable, and collects on the debts themselves.


• Factoring Accounts Receivable-Small business owners should understand that factoring your accounts receivables, means that you actually sell them. This is as opposed to pledging them as collateral, to a factoring company. This works when the factoring company gives you an advance payment, for accounts you would have to wait on for payment. Statistics show that the advance payment is usually 70-90% of the total value of the receivables. After charging a small fee to the company, (usually 2-3%), the remaining balance is paid after the full balance is paid to the factor. Factoring is a relatively expensive source of financing, however, it should be noted that the cost is lowered because the factoring company takes on all risk of default by the customer. Factoring has become highly important in the retail industry in the U.S. Studies show that the garment industry accounts for about 80% of all U.S. factoring. However, many small businesses in a huge variety of industries use this form of financing when they need short-term working capital loans.