Small business owners and entrepreneurs are constantly in need of capital. Without capital, there’s no way to launch a new business, let alone keep it running. Thankfully, there are several ways to acquire capital, including conventional means such as small business loans, and non-conventional means such as accounts receivable. So, what is accounts receivable financing and is right for your business?
What is Accounts Receivable Financing?
Accounts receivable financing, or factoring loans, is a special type of financing in which a business uses its outstanding invoices (e.g. money owed by its customers or clients) as collateral in exchange for a loan.
Banks and lenders are often hesitant to lend money to small businesses, especially if the small business has little-to-no record of income/profit. After all, why would a bank give money to a business if that business has not shown that it can repay the loan? With accounts receivable financing, small business owners and entrepreneurs can acquire capital without jumping through the hoops and hurdles of traditional bank loans. As long as they have outstanding invoices, they can typically acquire financing through this method.
You might be wondering how much capital you can acquire through accounts receivable financing. Well, there’s no easy answer to this question, as it varies depending on the lender, your business, the market, and other factors. However, most business owners receive somewhere between 70 to 90% of the value of their invoices. If you have outstanding invoices worth $10,000, for instance, you can expect roughly $7,000 to $9,000 of funding through accounts receivable financing.
Benefit of Accountants Receivable Financing
The main benefit of accountants receivable financing is its ease of acquisition. Whether your business has been up and running for years, or if it’s just getting off the ground, you can acquire capital though this means as long as you have outstanding invoices. The invoices are simply used as collateral, reassuring the lender that you’ll repay the loan. And if you don’t repay the loan, the lender can take these outstanding invoices.
Accounts receivable financing isn’t for everyone, though. You may have to give up certain control of your business when using them. The lender (known as the factoring company) could tell you to stop doing business with one or more customers, for instance.
Hopefully, this gives you a better understanding of accounts receivable financing and how it works.