Choi Lawyer Talks About Finance

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Is Accounts Receivable Financing The Right Option For Your Business?

What is Accounts Receivable Financing

In a business owner’s journey, they will probably need to secure additional financing to help it operate or grow. Although you have previously qualified for a traditional business loan or worked with a generous investor to fund your initial startup, those options are not guaranteed to be available the next time you need financial assistance. That is when accounts receivable financing can come in handy.

 

What is Accounts Receivable Financing?

Accounts receivable financing, also called invoice financing, provides your business with money based on the value of your outstanding invoices. Generally, accounts receivable are assets whose value is equal to the unpaid balances on the invoices (customers who have been billed but have not yet paid). If you were to obtain a business loan, finance companies would use unpaid invoices as collateral to calculate how much money to loan you, and they will charge you a fee based on the value of your outstanding invoices.

 

How Does Accounts Receivable Financing Work?

Accounts receivables are on a company’s balance sheet as a current asset that can be structured as invoice factoring and discounting.

With invoice factoring, you factor your invoices by selling them to a factoring company, which then pays you the money owed to you. The factoring company will directly collect the invoice payments from your customers.

With invoice discounting, you use your invoices as collateral for a loan. In contrast to factoring, you are still responsible for collecting payments from your customers.

 

Advantages of Accounts Receivable Financing

✅ Fast funding:
Whatever your account receivable financing structure, it is one of the most efficient ways to obtain additional working capital. Your money may be available as soon as 24 hours, depending on the lender you select. This speed of funding makes accounts receivable financing a great option to solve short-term cash flow problems.

✅ Minimal credit requirements:
With invoice discounting or factoring, what the financing company concerns with most is the quality of your invoices. If your customers have good credit and make timely payments, your credit rating is irrelevant. That is because it is the invoices that serve as collateral. Therefore, you can get accounts receivable financing without a stellar credit history if you have reliable customers.

✅ Ability to outsource the collection:
Invoice factoring entails the factoring company taking over the responsibility of collecting payments. For many entrepreneurs, this takes the heavy administrative burden off their plate. However, remember that invoice factoring is the only case in which this applies. With invoice discounting, you will still collect invoice payments.

 

Disadvantages of Accounts Receivable Financing

✅ Can Be Costly:
The fee structure for accounts receivable financing can be complicated and expensive. The rate you pay depends on:
✔ The quantity of and average invoice amount.
✔ Your company’s industry.
✔ Your customers’ creditworthiness and payment history.

Factoring fees typically range between one and five percent, depending on the factors mentioned.

✅ Lack of control:
Some entrepreneurs enjoy outsourcing the collection of payments to factoring companies, while others may feel uncomfortable with the loss of control. It is worth noting that collecting payments is a vital component of your customer’s experience (and sometimes, a sensitive one). If you choose to factor in your invoices, you lose all control over this integral part of your customer’s interaction with your brand.

✅ Dependency on customers:
One of the great benefits and flaws of accounts receivable financing is its dependency on your customers. In contrast to other types of financing, your chances of being approved are not as dependent on your credit history. If your customers have a poor credit history, it is hard to get approved, or you’ll pay a higher factoring fee even if your application gets approved.

 

Conclusion:

If you are facing an unsteady cash flow or have heightened cash needs because of seasonal changes or business growth, accounts receivable financing might be what takes your business from good to great. Instead of waiting weeks for your customers to pay you, you can quickly access capital by leveraging your unpaid invoices. 

Whether you decide on accounts receivable financing or another type of business loan, make sure you find the right lender for your business and consider all financing options.

 

Author Bio

Senior Lawyer | Website

Michael Choi is a senior lawyer based in Hong Kong whose background includes international trade and trade financing. Over his career, he has assisted numerous international corporate clients in raising capital and increasing their funding levels. Michael has also provided free legal advice to the public in Hong Kong since 2011 to assist those who cannot afford to pay the legal fee.

Founder of:
Choi Lawyer
Free Legal Advice
Co-Founder of:
Nugget Global

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