Your accounts receivable are an asset that you can use to secure a loan, just as you might use equipment or any other business asset as collateral. If your business sometimes needs help with cash flow, this type of financing can be a good alternative to more traditional loans. How do you know if AR financing will work for your company?
AR Financing Defined
Accounts receivable financing, sometimes known as invoice financing, treats your customer invoices as a security for money the finance company provides to you. In the most common arrangement, the invoice financing company advances you a certain sum of money, and you pay them back a percentage of your receivables when your customers pay you. In a model known as invoice factoring, you sell a portion of your unpaid invoices to the factoring company at a discount to raise money. At that point, collecting the unpaid amounts from your customers becomes the factoring company’s responsibility.
Is Invoice Financing for You?
Using your receivables to raise funds can have real advantages, including the ability to qualify more easily and get cash more quickly than through conventional business loans. The key is to make sure your company is a good candidate. Before pursuing accounts receivable financing, look for some key indicators that it’s a good fit for your business:
- Invoice-based business. You need to have a good supply of invoices to qualify for AR financing.
- Recurring cash flow issues. If you have highly varying amounts of revenue, invoice financing may ensure you have enough cash for expenses.
- Loan Qualification Challenges. Whether your company is too small or you simply don’t have the greatest credit, an alternative source of funding may be easier to get than a bank loan.
When AR Financing Won’t Work
Of course, an AR funding model won’t work for every company. You should be able to discern easily if accounts receivable financing is unsuitable for your business.
- Cash-based business. If your business doesn’t rely on regular invoicing of repeat customers, an invoice-based means of financing doesn’t make sense for you.
- Unattractive invoices. Even though AR finance companies can be easier to work with than banks, they do have some standards. You may not be a good candidate if your invoices are too old or too small to be attractive to the lender.
- Close customer relationships. With invoice factoring, you’ll turn over your invoices to a third party, who will then be calling your customers to collect. Consider whether you want to risk alienating your customers by having a company you don’t control nagging them about your invoices.
If you have an invoice-based business, AR financing can be a powerful tool to get past occasional dips in your revenue and help you meet expenses. When a conventional bank loan is out of reach, your valuable invoices can put ready cash within your grasp. Contact Latta Commercial Capital today to learn more about our accounts receivable financing solutions.