Pros and Cons of Accounts Receivable Financing

When your business experiences gaps in income, you need access to cash quickly. Accounts receivable financing offers a way for your company to borrow money against the value of your unpaid invoices. You back the loan or line of credit with your invoices. A bank or financial entity provides you with a cash advance for part of your total outstanding receivables.

The Pros of Receivable Finance Options

Borrowing money using one of the primary receivables funding methods can provide many advantages. You will gain access to necessary funds quickly. Depending on your chosen lender, you can receive cash within a day. Receivables financing offers an ideal way to solve short-term monetary issues and cover your daily expenses.

You do not typically need a strong credit score to gain approval, as the bank bases lending on the strength of your customer’s creditworthiness. Your invoices serve as collateral, meaning you do not need to put up other assets to obtain funds.

If you choose to factor in to gain access to working capital, you no longer have to collect debts from your customers. The factoring company handles all collections processes after purchasing the invoices from you.

The Cons of Accounts Receivable Financing

As with all business decisions, there are also disadvantages to funding using your receivables. Sometimes, lenders have complex fee structures that can become costly rather quickly. It is critical to understand how the fees accrue and what percentage you pay to gain quick access to your outstanding invoices.

While you can get approval for this lending without a good credit score, you are taking on risk by depending on your clients. You will pay high factoring fees if your patrons have poor credit scores. If they are delinquent with payments, you will likely owe more fines. You are usually responsible for covering the unpaid amount if customers fail to pay.

If you select factoring as your borrowing method, you lose control of your collections process. While this benefits some businesses, it can be detrimental to others. Customers sometimes value personal interaction with your company and may feel put off by having another entity handle payments.

Accounts receivable financing gives you immediate access to working capital so your business can maintain consistent operation, even when revenue is low. Seasonal fluctuations, unexpected repair costs, investment opportunities and other factors can cause a dip in your cash flow. Consider the advantages and disadvantages to determine the best funding type for your company.

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