3 Benefits of Accounts Receivable Funding
Most companies experience a period of financial uncertainty at some point. Rapid growth, unexpected large projects and other events may require more funds than the company can provide. If the company does not have a suitable credit history or collateral, then bank loans are not an option. Using credit cards can be costly, as annual fees or high interest rates can negatively impact the bottom line. Accounts receivable financing may be the right solution for a business that needs cash quickly.
1. Ease and Speed
Funding is obtained when the company sells its accounts receivables at a reduced rate in exchange for cash. The transaction is usually completed quickly, and the funds are available almost immediately. While a credit check may be performed on the company’s clients in order to ensure they are a good risk, there is no credit check performed on the company itself. This can make a huge difference when a company needs funds to begin an important project for a new client or pursue an opportunity to expand.
2. Reduced Risk
Collecting money from clients can take a long time. Typical payment terms can allow a grace period of up to three months. While some clients may be willing to pay invoices early, especially if offered a discount, others may wait until the last minute. Some customers may not pay on time and end up in collections. Waiting for the money to trickle in can be detrimental to the company. The company that purchases the accounts receivables is responsible for collecting on the debts. While selling the accounts receivable results in less money obtained overall, it drastically reduces the risk of non-payment and allows workers to spend less time chasing clients.
Accounts receivable financing can be used whenever a company is in need of cash. The company can select which accounts receivables to sell and which ones to keep. That way, cash can be obtained for the amount needed without having to sell more than necessary. Companies should evaluate their finances carefully in order to maximize profits while ensuring a sufficient short-term cash flow.
It can be frustrating to try to run a company without adequate funds. While a chronic shortage of funds can indicate a problem, occasional instances are normal. Companies, especially in the early stages, may struggle to keep enough funds on hand. Accounts receivable financing can be a great solution for companies that need cash quickly.