Accounts Receivable Financing Made Easy 

Regardless of a company’s shape and size, chances are, they will run into cash flow issues. This is especially true of small businesses in their early years. An easy way for many companies to mitigate these concerns is to take advantage of accounts receivable financing.

Simply put, accounts receivable financing programs assume a business’ billing, and for a small percentage of the amount due or fee, provide funds immediately to the company. 

There are five basic types of accounts receivable financing. “Factoring” is the oldest and most popular. It is the most straightforward method, where purchase orders or accounts receivable are sold for immediate cash.

“Inventory financing” is quite a different manor of accounts receivable financing. In inventory financing, a line of credit is extended to a business based on the value of the inventory they have on hand (which is used as collateral.) The advantage of the line of credit is that the company only needs to take the cash that it needs when it needs it, with the remainder available later as required.

“Purchase order financing” is designed to use existing orders or contracts as collateral for a secured loan. 

“Single Invoice Factoring” is a form of factoring in which a business can advance payments based on customers’ pending purchases.

“Asset based lending” is any type of lending that is secured by collateral.

So how can you determine if one of these forms of account receivable financing is right for your company? It’s important to know that while factoring used to be considered a last resort, in recent years, it has become a much more standard practice. 

It comes down to this: if your business is billing accounts receivable and you need to have more cash on hand to cover a major new expense, or an unexpected need for funds, accounts receivable financing is a practical way to keep the company in the black. Finance rates are typically very reasonable; businesses usually end up keeping 80 to 90% of the amount due to them, and the tradeoff of the small fee is well worth the influx of immediate money. Using inventory or purchase orders for financing may seem a bit more intimidating, but the financial structure is there to make them solid and reasonable bets. 

As with all financing options, a track record of financial success opens many doors. Knowing the options of borrowing against accounts receivable can help you get your business out of short and long-term jams!

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