If you’re a small business owner and you’ve been searching for ways to improve your cash flow without needing to take out excess loans and put yourself and your company into debt, you may have thought about accounts receivable financing. As a business owner, you know that sending an invoice to a customer doesn’t automatically mean money in your bank account. In fact, sometimes customers can take up to three months to pay their invoices! If you have outstanding invoices and need working capital to keep operations running smoothly, this financing option could be the right move. Read on to learn the basics of how it works and whether it’s right for you.
You Get Advances Based on Outstanding Invoices
Sometimes also called invoice or AR financing, this funding option isn’t technically a loan, since it works with future money that you’ll soon be receiving from customers. Similarly to factoring, you receive a percentage of the total invoice value amount, sometimes even up to 100%. Depending on the company you work with, you may be able to maintain control of collections as well. This means that if a customer fails to pay, you may have to contact them directly. The upside of not being contacted by another company is that the customer won’t suspect that your business is borrowing money or in financial trouble.
You Can Finance One or Several Invoices
Depending on the company you work with and your individual situation, you’ll have the option of financing just one invoice or a whole batch. If you only need a small amount to get you by, it might make sense to just finance a single invoice. On the other hand, if you’re stuck in a slow season and need a lot of working capital to get you through the financial slump, you could potentially finance a whole group. This is a simple way to get the cash flow you need quickly, without having to go through the hassle of applying for conventional business loans.
Make Sure You Have Enough Cash Flow for Fees
Some companies may charge fees for late advance repayment, so make sure you’ll have enough cash on hand to cover this. As always, read any agreements thoroughly before signing.
Keeping enough working capital on hand to maintain daily operations is essential to any business but isn’t always easy, especially when customers take their time paying invoices. Thankfully, accounts receivable financing offers a helpful and realistic way to get much-needed cash flow without accumulating unnecessary debt. Keep these facts in mind, and you can feel prepared to make the right decision for your company.