Using Accounts Receivable Financing to Keep a Business Running
Businesses always have to be planning ahead, especially when it comes to their budgets. A week of record-breaking sales can be followed by one of the slowest weeks in company history. In general, these trends are easy to predict and businesses can adjust for them. For example, sales tend to skyrocket in November and December, but then they have a low point for a few weeks in the new year. However, other sales-impacting events, such as natural disasters, cannot be predicted. To make ends meet in times of financial difficulties, whether they are planned or not, turn to accounts receivable financing.
The phrase “accounts receivable” means the invoices for which a business is still awaiting payment. Clients often do not pay their entire bill right away, either because they are paying in installments or because they are waiting for the necessary funds. Thus, the business has a set amount of payment that it will receive but has not yet. While the clients’ payments cannot be rushed, the business can access this money early by selling the invoices to a third party. This third-party company presumably has enough money to wait for the clients’ payments to come in to make up the money that it gave the initial business.
Unlike with factoring, where the business sells the invoices at a discount to the third party, in this situation the business receives all of the money that the clients would have paid later. As a result, the business will not lose money by using accounts receivable financing. However, business owners should note that if their budgets are based on receiving payment at a certain time, this early influx of cash could interfere with payments scheduled for a later time. The money generated from selling the invoices may be enough to cover future expenses, such as wages, rent and utility costs, before the next scheduled payment. Business owners should review their budgets and decide if they want to sell all of the invoices or just the ones needed to generate enough money to keep the business running.
This type of finance has the benefit of not being a type of debt. Businesses do need to make sure that the clients’ payments go to the third party when they come in. However, no interest rates are associated with the transaction and it does not affect anyone’s credit score.
Financial rough patches can be difficult to overcome, especially for small businesses. Alternative forms of finance such as accounts receivable financing can help businesses access their own money early and stay functional.