Maintaining a healthy cash flow is important to businesses – not just for that sake of keeping daily operations running smoothly, but also for growth. While it is a standard that most customer invoices have aging windows ranging from 30 to 90 days, waiting for payment can cause a severe strain on cash flow, especially for new and small businesses. In order to correct this situation, many business owners use accounts receivable financing.
What is Accounts Receivable Financing?
Accounts receivable financing is designed to eliminate the aging window and get businesses cash immediately. A business will sell unpaid invoices to a third party that specialized in accounts receivable financing. The business then receives cash, minus that fees charged by the financing service. Financing agreements can be arranged very quickly and cash is usually made available within 24 hours of submitting an invoice.
No Debt on the Balance Sheet
When businesses experience a strain on cash flow, they sometimes fell that their only course of action is to take out a short-term bank loan. The problem with this is that a bank loans can have high rates of interest, and they cause debt to show up on the balance sheet, which can restrict businesses from getting additional funding. Accounts receivable financing, on the other hand, is considered a sale, so it is not listed as a liability on the balance sheet.
No Credit Checks
Because accounts receivable financing is not a traditional loan, it is not directly tied to a company’s credit rating. If anything, the finance company is more likely to check the credit rating of the end customer to see how likely they are to pay their invoices on time.
Fewer Accounting Headaches
Keeping track of multiple customers and tracking the aging period on each sale can be very time consuming when going over accounting records. When an invoice is sold to an accounts receivable financing company, they assume the responsibility of tracking down payment from the customer. This frees up time and other resources that would otherwise go toward hunting down payments. This can save business owners a lot of time and money.
While accounts receivable financing has a history of being employed when businesses were in a bind and needed to collect money to alleviate the strain on cash flow, many business owners are now building long term relationships with financing companies to ensure a steady cash flow for the long run. The fees deducted when invoices are sold to an accounts receivable financing company are low, and far outweigh the benefits that come with having instant access to cash.