subject: receivable financing [print this page] receivable financing receivable financing
If you are a small business owner, you should be well aware of the difficulty in finding enough money to support your business operations and deal with shortages in cash flow. When possible business financing like loans and credits are not enough, business owners will sometimes resort to accounts receivable financing. However, is this kind of business financing right for you and your business?
Accounts receivable financing refers to the selling of receivables, like outstanding invoices at a discounted price to another company that will assume all the risks on a receivable and provide instant cash to the business. The age of a receivable affects the value assigned to it. For example, receivables that are over 3 months are usually not financed. This type of financing is also known as accounts receivable factoring.
This kind of financing offers some advantages over conventional financing methods. By outsourcing the management of your accounts receivable to other companies, you will be able to free up your resources. Your business will be able to focus its attention on other business activities such as planning of sales and production.
A lot of companies today are unable to use most of their capital because majority of it is tied up in their business inventories. With accounts receivable financing, your business will be able to free up capital that is tied up in the business inventory. You can then use this free capital on other more productive business expenditures.
Unlike other forms of financing, accounts receivable financing does not require much documentation. There is no need to create business plans or a record of the most recent tax statements. This method of financing allows businesses to get quick cash, ideal for instances when a firm is experiencing income fluctuations or sudden financial issues.
Although accounts receivable financing has some benefits to your small business, this method of financing may have some potential drawbacks. Probably the most significant factor of this method of financing is its cost. Although a small discount fee looks insignificant in the present, over time, the costs can actually exceed the interest rate of a conventional loan. It is important to look for companies that offer reasonable prices and conditions.
