This type of financing involves selling the accounts receivables of a business to a finance company. The business gets the cash it needs to run its business, and the finance company is repaid when the customers pay their invoices. The business will not receive the full face value of the invoices. The finance company will keep some money back for its fees and to compensate for any customers who may not pay their invoices.
The business can use the financing for any business use. There are no restrictions, as there might be with other types of financing. Some examples of ways to use the financing are to grow the business, purchase additional inventory, meet payroll, hire additional workers, purchase equipment or spend it on marketing.
Instead of waiting until the customers pay their invoices, the business can use the cash right away when it is needed. A business often has cash flow problems due to the seasonality of the business, slow-paying customers, large orders that need to be filled, and other reasons. This financing allows the business to receive the cash necessary to handle these critical needs.
When you take out a conventional loan, you have to pay the lender every month, no matter how your business is doing. With financing using accounts receivables, if your business is not doing well, you will not have very many accounts receivables, so you will not need to pay as much to the lender. The customers are the ones paying back the lender, rather than your business.
Your customers must have good credit in order for the finance company to approve the financing. If your customers are not that good about paying their bills, you could be charged higher fees for the financing, or you may be denied receivables financing completely.
With receivables financing, you lose some control over your business. Your financing company may not let you do business with customers who have poor credit. Your customers may have to send their payments directly to the finance company, causing them some confusion.
Accounts receivable financing can be an easy way for a business to come up with the cash it needs, but it does come with a few disadvantages. Only you can decide if it is right for your business.
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