There are times in the life of your business when mainstream finance options like loans and credits will be inadequate for your needs or beyond your reach. One option that may be available to you at a time like this is to consider accounts receivable financing as an alternative way of getting the cash that you need to run your business.
What, you may ask, is accounts receivable financing? Sometimes referred to as factoring, accounts receivable financing may be simply defined as a process whereby you sell the outstanding invoices for products or services already delivered by your business (otherwise known as receivables) to a financial institution (bank, finance house, etc.) at a price that is lower than the value of the invoices.
By this transaction, your business transfers ownership of the invoices to the financial institution, which then pays the discounted value of the invoices to your business, as negotiated and agreed in accordance with the quality and age of the invoices. It, thereafter, becomes the right and responsibility of the financial institution to get paid for what had hitherto been your invoices or receivables.
Accounts receivable financing works on the premise that your business has valuable assets (invoices) that can be financed. Based on this, the financial institution advances money to your business, for the slow-paying invoices of your business, waits for your customers to pay to it, and charges a small fee for this service.
Accounts receivable financing offers a source of immediate cash flow to enhance the growth of your business. It is collateral-free finance, unsecured, and does not require a pledge of assets or provision of guarantors.
On the downside, the speed of accessing cash for your business is mitigated by the higher cost that comes with discounting your invoices. This could be substantial over time.
In spite of this shortcoming, your business requires cash flow to support its various daily operations. And, given that access to credit is usually tight, with traditional lenders usually unwilling to help, accounts receivable financing can help your business in overcoming these financial challenges.
If your company does business with big companies, conglomerates and government, you know that they take their time in settling your invoices. You certainly suffer the agonies and frustrations of waiting 30, 60, 120 days, or much longer, to get your invoices paid.
True. They get to pay. But they take their time, and your time. They don’t care about your immediate challenges, about your suppliers that must be paid now, or payroll that must be met at month end!
It is often a paradox of business that while your biggest customers may be your biggest assets, they can also be your biggest liability if they do not settle their invoices as and when due. Because your business incurs fixed and variable costs in regularly providing products and/or services to these customers, and the customers do not reciprocate equally in settling their invoices, they put your business in a position where it is constantly mismatching its expenditures and incomes, with the former always running ahead of the latter.
In this situation, you must find a way to bridge the financing gap. If you are the typical Small Business Owner who cannot go to a bank for a business loan, accounts receivable financing can give your business the money it needs, by unlocking monies in your slow-paying invoices. The key requirement for embracing this option is to have credit-worthy customers.
So, if your business is choke-full with credit-worthy, but slow-paying customers, one solution available to you is to finance your accounts receivables. It will provide the cash to pay your suppliers, pay salaries and meet your assorted financial obligations. It will minimise, if it does not eliminate, your financial worries. It will give you the peace of mind to run and grow your business.
While a receivable financing arrangement is not a loan, it is important to back it with a written and executed agreement that spells out terms like the discount rate, the start or end date(s) if it covers multiple invoices over a period, when the business gets paid, etc.
Does your business have accounts receivable it wishes to finance and needs help to do so? Visit the SME Clinic at https://smefinance.org/sme-clinic/