Kris Koonar asked: If you feel stuck in your business due to an acute shortage of cash and are struggling to wriggle out of a difficult situation, you have no option but to go for the right kind of financing that suits your requirements. If you have started a new business and have limited options of availing of usual loans and credits it is time you turned to accounts receivable financing.
Accounts receivable financing is probably the quickest way to get cash for your business by selling your outstanding invoices or receivables at a discount to a financier or a factoring company that assumes a certain amount of inherent risk. In principle, the receivables are treated as an asset and are pledged as a collateral against which business firms may draw cash. What determines the credit line is the financial strength of the buyer rather than that of the client, who is the seller of the receivables. In principle, banks may also consider receivables as security but in practice it is commercial finance companies that do receivable financing.
In order to achieve ambitious sales targets an increasing number of businesses often decide to offer credit terms to clients. At the same time they need working capital to finance the growth of their business. In such situations they need not approach a bank for borrowing money. Account receivable financing comes to their rescue with ready cash.
The whole process of accounts receivable financing is pretty simple and doesn’t take much time. In most cases, financiers make their decisions and determine the amount of financing on the basis of invoicing process and the credit strength of the account debtor/buyer. Usually they don’t take in to account tax returns, financials or for that matter equity to debt ratios. Thankfully, there is very little paperwork and underwriting involved. In most cases, initial funding is available in three to five working days.
Companies of all sizes and financial health are eligible for accounts receivable financing. Even start-up enterprises with irregular sales patterns can qualify for receivable financing provided they are able to generate sales on open credit terms to customers with reasonable financial credit strength. It is a boon for those businesses where past earnings may not qualify for a conventional loan or an increase in their credit line.
It is important to understand that it is the age of a receivable that determine the amount of value assigned to the account. The more recent an invoice the greater would be the amount of funding. On the other hand, an account receivable that is more than 90 days old is unlikely to attract any financing.
While accounts receivable financing is gaining popularity it is vital to be aware of its inherent drawbacks. A 5% discount fee may not make a big hole in a company’s resources but in the course of time the costs can considerably exceed the interest on bank credit or a loan. Besides, unlike the banking industry the factoring industry is not well regulated. So while going for such financing carefully study the contract and negotiate discount rates. Sooner or later you must graduate from accounts receivable financing to a regular credit line from your bank.
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