A bank loan isn’t the only way you can finance your business’s operations. There are alternative financing options available, one of which is accounts receivable financing. If your business uses invoices to collect payments from its customers or clients, you can use accounts receivable financing. With that said, you might be wondering how this alternative financing method works exactly.
The Basics of Accounts Receivable Financing
Accounts receivable financing involves tapping into your business’s unpaid invoices for financing. There are private financing companies that specialize in accounts receivable financing. They will either buy your business’s unpaid invoices — typically at a slightly lower rate than their face value — or they will loan you money using your business’s unpaid invoices as collateral.
Under the former option, you’ll obtain money by selling unpaid invoices to a private financing company. The financing company will essentially buy your business’s unpaid invoices. Under the latter option, you’ll obtain money in the form of a loan by using your business’s unpaid invoices as collateral. You’ll still have to pay back the loan, but you’ll get immediate cash that you can use to finance your business’s operations. There are the two basic methods used for accounts receivable financing.
Advantages of Accounts Receivable Financing
Many businesses struggle to collect payments from their customers or clients. With accounts receivable financing, you don’t have to waste time or resources trying to collect payments. You can simply sell the unpaid invoices to a private financing company.
Accounts receivable financing is also faster than traditional financing methods, such as bank loans. It can take well over a month for a bank to approve your business for a traditional loan. In comparison, private financing companies may approve your application for accounts receivable financing in just a few weeks. If your business is in dire need of immediate cash, accounts receivable financing can be an attractive choice for this reason.
Disadvantages of Accounts Receivable Financing
Accounts receivable financing, of course, is only an option if your business uses invoices. If customers or clients pay upfront, you won’t be able to use this alternative financing method.
If you intend to sell your business’s unpaid invoices, it’s important to note that you won’t get the full value for them. Private financing companies make money by buying unpaid invoices at a lower value.
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