How accounts receivable factoring can save your business
For a small business, loans can be a lifesaver most of the times. The only caveat for loans from financial institutions is the lengthy application process that you will be subjected too. This is why alternative financing exists and you as a business should be taking advantage of it. The most known form of alternative financing is accounts receivable factoring. In the recent past, this form of financing has become very popular for small business. It could benefit your business significantly if you get to understand how this type of financing works.
What is accounts receivable financing?
Before we into how accounts receivable factoring works, its wise that you first get to know what it is. You should as a business be aware that there are two types of this financing. The whole concept relies upon expecting money in the future from invoices your business has now. The first type is what is usually referred to as account receivable loans. Here, you take a loan based on the invoice your business has, and when you get the money in future, you repay the loan. The other type is the subject of today which is accounts receivable factoring. Here, as a business you pass on the invoices you are expecting money in the future from to an alternative financing firm or lender, and they pay you. When the money from the invoice is paid, it goes directly to the alternative financing firm or lender.
How accounts receivable factoring works
Accounts receivable financing works via a straightforward concept as you will soon find out. When the lender or alternative financing firm takes your receivable invoice in exchange for cash, they get to discount a certain amount (factor). The discounted amount or the difference between the cash value of the invoice and the cash you receive is what the lender or the alternative financing firm keeps as their fee. It’s a simple concept, isn’t it?
How it could save your business
Accounts receivable factoring is a form of alternative financing for small businesses that solves a lot of the shortcomings of mainstream business financing like banks. This is what has made this type of financing very popular in the recent past with small businesses. This is how this type of account receivable financing can save your business.
Provide cash urgently when you need it
One of the problems of mainstream financial institutions like banks is that their business loans quite some time to process. More than often, as a business you will find yourself in a situation where you need cash urgently. The situation may be defining for your business like urgently purchasing new equipment that’s on a limited-time discount offer. In these situations, traditional financing institutions might not be of great help. This is when you can turn to accounts receivable factoring to get the cash. In this type of financing, you get the cash immediately rather than have to wait as you would in banks when you apply for a business loan.
Access financing even if you have wanting credit history
Today, it’s pretty hard for you as a business to access financing from mainstream institutions if you have a poor credit history. For instance, banks mainly provide financing if you have a reliable credit history. If you were to depend on banks in this situation, things would likely go sour for your business. On the contrary, accounts receivable factoring will provide you with the cash needed as it doesn’t consider credit history. This can really save your business at its moment of need.
Access financing even with unsatisfying sales/revenue history
Another major factor that banks consider when giving loans to businesses is their sales or revenue history. If you as a business have an unsatisfying business sales and revenue history, then it is very likely that you won’t get the loan. You might be in need of the cash to set your business on the success path, but the mainstream financial institutions won’t hear any of that. Rather than let your business fail, you can turn to accounts receivable financing to get the cash. Even better you will get the cash almost instantly and get to save your business from falling. What a relief?