When your business is low on cash, what can you do? If you don’t have money coming in, you can’t pay the bills or stock your inventory. You can’t always rely on banks to bail you out with traditional loans, especially if your credit score is not stellar. If you have a stack of unpaid invoices that are putting your finances in jeopardy, there’s an option available to help you. It’s called accounts receivable financing, otherwise known as invoice financing or invoice factoring.
Accounts receivable financing has been around for a long time. It basically means you will sell your outstanding invoices at a marked-down price in order to get immediate cash. The finance company assesses the risk based on the age and quality of the invoices. This can be a life-saver for your business, but you should understand the pros and cons before you commit to this course of action.
Pros
One of the reasons you should consider accounts receivable financing is you can get your money in a short amount of time. You want to profit from your sales right away, and you also want to have a payment plan for your customers that is competitive in your market. A factoring company can solve both of these issues for you with a fast cash payment.
Another advantage is that an advance from a factoring company frees up some of your cash that would be unavailable otherwise. Some areas of your business cycle might have a cash flow gap that is hindering your growth or slowing your operations. The available cash from receivable financing can get your business moving again.
Furthermore, a factoring company can take some of the workloads off of your accounts receivable department. This can save your business some labor costs, and speed up your administrative process when your company no longer has to chase down customers who haven’t paid. Your finance department has plenty to deal with without this additional burden.
Cons
With the convenience of quick cash from receivable financing comes a cost. Since you’re selling your receivables at a discount, you’re not getting the full profit from your sales. The factoring company takes out receivable fees and deducts interest on the advance, so it’s usually more expensive than other types of financing.
Another drawback is you might need to relinquish control over some business processes. The factoring company might limit your sales to people that it deems to be too much of credit risk. At the same time, as you relinquish control over some of your accounts, you still remain accountable to the factoring company for late or non-paying customers.
Using this option to bail your business out of trouble can be a life-saver, but use discretion. You can get some quick cash when you need it, but it comes with higher costs, and you’ll lose some control over your operations. All businesses face difficulties that are beyond their control, but you can keep the ship afloat if you properly weigh the pros and cons.