Many businesses use invoices to keep track of customer debt after delivering goods and services. The problem is, they can’t be certain that they’ll get paid. Even when they do receive payment, it’s often 30, 60 or even 90 days after they’ve delivered. This can put businesses in a bind, especially if they’re trying to expand operations.
Fortunately, you can take this financial risk and turn it into an asset. With factoring, also called accounts receivable financing, you can access the working capital you need.
How Factoring Works
When you partner with a lender for accounts receivable financing, that lender takes on the debt owed to you by customers. Financial institutions analyze customers’ credit history, then determine the risk of default. They then pay you a percentage of the debt based on that risk and take responsibility for collecting from the customer.
What the Benefits Are
One of the biggest benefits of account receivable financing is instant access to cash. While you don’t get the full amount owed by the customer, you do get a significant amount quickly. You’re also guaranteed some compensation from the financial institution, whereas you may lose out entirely if you try to collect on the debt yourself. Additionally, you don’t have to use resources to collect on a debt that may never actually be paid.
Who Can Take Advantage of This Type of Financing
If your company largely uses invoices to bill for goods and services, this type of financing may be a great solution to cashflow problems. You may also be a great candidate if you don’t want to risk collateral by taking on a traditional loan. Additionally, you don’t have to worry about making monthly payments or accumulating interest. While traditional loans are helpful in many industries, they can’t offer the same flexibility and benefits to enterprises with seasonal or fluctuating profits.
How You Can Qualify
Unlike the majority of traditional loan options, factoring may be available to businesses with poor or no credit history, few assets, and cashflow problems. How is this possible? Instead of looking at your enterprise’s history, financial institutions are solely concerned with customer credit. This means that even start-ups and companies in bankruptcy can qualify.
When you’re struggling to fund your operations and can’t qualify for traditional loans, accounts receivable financing may be an option. It takes a major risk and turns it into an asset, eliminating several issues at once. By partnering with an alternative lender, you can meet your growth goals and see an increase in profits.