Accounts Receivable Financing Basics

If you own a small business that has less-than-average credit or needs a quick infusion to your cash flow, then you might have looked into accounts receivable financing. AR financing is an asset-based lending solution with an often faster and easier approval process compared to more traditional loan products.

There are several different types of AR financing that appear very similar on the surface but are quite different. Understanding the advantages and the downsides to the two major categories could help you decide which option may benefit your company’s financial situation.

What Is Accounts Receivable Financing?

AR financing is sometimes referred to as Asset-Based Lending (ABL) because your accounts receivable ledger is an asset that can be used as collateral for a loan. Some asset-based lenders also go beyond basic loan services by offering financial assistance and advice to help your business improve and grow.

Pros

AB lenders can work with your company to provide a customized package of support services which may include:

  • Payroll
  • Financial reporting
  • Tax assistance
  • Administrative processes

Some lenders also operate within specific industries so they understand the intricacies unique to the business, and could help you develop a plan for growth.

Cons

Although an ABL application is typically less stringent than that of a conventional loan, your lender will still need to take your business history and credit rating into account. The underwriting process usually requires your business and personal credit reports, financial statements and a personal guarantee.

What Is Invoice Factoring?

Your other primary option is invoice factoring, which is a sale of your current debt assets instead of a loan. A factoring company (or factor) will provide you with an upfront lump payment for the total value of your open customer invoices, minus a discount.

Pros

Factoring can be more beneficial than ABL because the payment is cash in your pocket that you can use for anything you like, plus it can be readily available to almost any company with an invoice ledger. Since the factor is more concerned with your customers’ ability to pay than yours, you might have lousy credit and still be approved for factoring.

Cons

However, when you factor your invoices, you essentially give up all your control over the collection process. Your factors could potentially put its name on your invoices, require your customers to pay them directly and impose credit limits outside of your company’s standard procedures.

Obtaining funding is typically a routine part of running a business. Accounts receivable financing is a concept that can provide you with several strategies for getting the cash you need when you need it.

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