When a company uses accounts receivable financing, they monetize customer payments that are due in the future, unlocking cash in the present. Commonly, this is done through factoring or through loans.
How Factoring Works
In a factoring arrangement, the lender buys the borrower’s accounts receivables for a discount. This relieves the borrower from the hassle of collecting the value of the outstanding accounts receivable, as that duty becomes the responsibility of the lender, who recoups the value of the loan from the customers who owe money.
How Accounts-Receivable-Based Loans Work
When a company enters a loan agreement involving accounts receivable financing, it’s often to use the outstanding accounts receivable as collateral. Generally, the lender extends a portion of the total value of the accounts receivable. In this setup, the borrower remains responsible for collecting the receivables.
Advantages of Financing through Accounts Receivable
Many businesses use accounts receivable financing because of its unique benefits. One is that this financing type improves businesses’ cash flow. Because they get money in-house sooner, they can put that money toward present-day expenses.
Another advantage is that accounts receivable financing usually doesn’t have a long repayment horizon. Instead of making payments for months or years, the business can move on from its financial obligation fairly quickly.
Some financing types require the business owner to surrender equity. That’s often the case for businesses seeking money from investors. But financing based on accounts receivable doesn’t have that drawback.
Yet another perk is that the barrier to accessing accounts receivable financing is much lower than it is with other funding options. That means newer businesses without years-long histories of creditworthiness may have more success than they would pursuing a traditional loan.
Assessing Your Options
Expert advice can aid you in deciding if accounts receivable financing is the right fit. No matter the type(s) of financing you’re considering, GM Capital Group can help you figure out your options. All you have to do is get in touch.