Accounts Receivable Financing: The Advantages and Disadvantages

Accounts Receivable Financing & Factoring: The Advantages and Disadvantages

Business owners often find themselves short of working capital. With all the financing options available in today’s marketplace, you might be considering accounts receivable financing to get financing to help you grow or expand your business.

What is accounts receivable financing?

This process involves selling your outstanding invoices to a financing company, sometimes referred to as a factor. The factor takes the risk on receiving payment on the invoice. In return, you are given a percentage of the invoice in cash. When the full value of the invoice is paid, the factor takes their percentage and fee. If any money is left over, your business gets the rest.

Benefits of Accounts Receivable Financing or Invoice Factoring

• Quick cash instead of capital on the balance sheet

• Accounts receivable financing can free up working capital for other purposes

• No collateral is required, no equity is given up

• You save time by outsourcing your collectibles

Disadvantages of Accounts Receivable Financing

As with any business decision, it’s important to weigh the pros and cons. Accounts receivable financing isn’t always the solution. Here’s what you need to know:

• Loss of control over customers

Your factor may tell you that one of your customers is not credit-worthy

• Cost

Financing your receivables often is more expensive than traditional loans.

• Your rate is based on your clients

This can be a good thing or a bad thing.

• Length of contract

You may have to sign a contract with the factor of 2 to 3 years, but the market is changing and allowing shorter contracts.

• Stigma

Sadly, there is a negative stigma associated with accounts receivable financing. Your company may be perceived as struggling, because you’re relying on factoring. You will have to be upfront with customers about your situation.

Get more information about accounts receivable financing and other lending options for your small business when you call (407-202-8494) Smart Capital Lending Group.


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