accounts receivable

You might have heard that borrowing against receivables is a quick and easy solution to help with your business cash flow problems. Or, perhaps you heard that it’s difficult and expensive. The reality is that there are numerous options for business owners facing a cash flow crunch.

Each has benefits and drawbacks. We’ll go over what it really means to borrow against your receivables, when it might be ideal and even highlight a few alternatives, so you can make an informed decision about what’s right for your business.

Why Do Businesses Borrow Against Their Receivables?

Businesses of all sizes and experience face cash flow shortcomings at some point. These can be caused by lulls in business, slow payments from customers and other unforeseen expenses, including needing an investment for large orders. Large, well-established companies typically turn to banks and secure loans or lines of credit when this happens. Small businesses and start-ups have more trouble qualifying for these financial products. And if they do, they don’t always get the level of funding they need.

For some businesses, collateral-backed lending options can be a go-to options in these situations. Many businesses put their real estate holdings, equipment and other assets on the line in order to secure loans. In these cases, the lender assesses the value of the asset and then offers a loan based upon the appraised value. This gives the lender more assurance that an otherwise risky borrower will make good on his payments and gives the lender recourse if the borrower doesn’t follow through with payment. With collateral-based financing, that means that the asset is taken.

Receivables are considered a leverageable asset which can be liquidated. That makes them an ideal form of collateral which can minimize risk for the lender and the borrower. After all, you intend to get cash for them anyway.

What is a Receivables Advance?

There are actually two primary ways to borrow against your receivables: financing and factoring.

Receivables Financing

With receivables financing, your lender looks at your books and explores how much your customers owe, how much you typically collect, and other considerations. Then, they offer up a loan based upon the value of what your customers owe you. In some cases, the loan works as a traditional term loan. You’ll make monthly payments which include a portion of the principal balance along with interest and fees until your balance is paid in full. Other times, it works like a line of credit or credit card. The financing company establishes a maximum amount you can draw from, and you take what you need. You make monthly payments and can continue drawing from the account until you reach your maximum.

Receivables Factoring

When you work with a receivables factoring company, that company purchases your invoices from you and handles the invoicing and collections process. You can pick and choose which invoices to factor, and when you want to factor them. The factoring company provides you with a large lump sum for a portion of the invoice. The factor then collects from the customer, and then gives you the remaining cash, minus a nominal fee. There is no debt to pay back when you borrow against receivables using factoring because you’re not taking out a loan.

Who Qualifies for a Receivables Advance?

  • Startups
  • Businesses with bad credit
  • Businesses with weak credit
  • Well-qualified companies that don’t want the burden of debt

What Can You Use Receivables Advances For?

  • Bills
  • Payroll
  • Hiring new employees
  • Equipment
  • Supplies and inventory
  • Working Capital
  • Other expenses associated with running your business and growing

How Do You Get a Receivables Advance?

The process of getting approved with a factoring company is simple. You’ll need to supply a few documents related to your business and the businesses you serve. The best way to find out how accounts receivable factoring works is to start by getting an instant funding estimate online now.

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