For business owners, finding ways to cover expenses when business is slow or when you need to make improvements around the building can be tough. Traditional business loans are always an option, but high interest rates and unfair loan terms make choosing them less than ideal. Accounts receivable (A/R) financing helps you get the money you need quickly without the frustrations associated with standard loans. Here’s what you need to know about this unique financing option.
What A/R Financing Involves
Accounts receivable financing allows businesses to use their outstanding invoices or accounts receivable to get money from a private lender. They give you a set amount upfront and you repay them in full plus any interest charged once your client settles their invoice.
The process eliminates the annoying waiting period between issuing the invoice and the final payment. You get the money you need immediately so you can start making those business improvements or cover outstanding bills quickly.
Depending on the lender you work with, you may even be able to select the invoices you finance. This allows you to continue receiving payments from clients who pay on time and gives you access to the money tied up in overdue invoices.
Why You Want To Use This Financing Option
The purpose of A/R financing is to give you access to money quickly, but there are far more benefits than just freeing up your cash flow. This type of financing allows you to avoid going into debt with your business, preserving your company’s credit score, and reducing the likelihood of the bank repossessing equipment.
The invoices you effectively sell to the lender are your collateral. If a client is late to pay, the lender can help with collections, giving you more time to focus on growing your business and finding new clients that can and will pay on time.
Since you’re able to choose which invoices you want to finance, you won’t disrupt your business’s bottom line. Instead, you’ll still gain access to the money you depend on from clients you trust while also getting the money you need when you need it from clients who never pay on time.
Even better, you’re free to combine this type of financing with any other financing options you choose. Since it doesn’t count as a loan in the traditional sense, it won’t make it harder for you to qualify for a business loan should you need to apply.
Accounts receivable financing is a great choice for small businesses. Just make sure you understand how it works before you partner with a financing company.