Businesses operations require a continuous flow of cash to facilitate the various needs. Cash flow is not always smooth and necessitates looking for alternatives like taking bank loans, sourcing for investors, and getting accounts receivable loans. Account receivable loans are also referred to as account receivable factoring or invoice factoring. They involve the sale of invoices to factoring companies which will do the debts collection.
The selling company gets a percentage of the invoice amount upfront, mostly 70% to 90% and once the factor does the collection, they get the remaining amount less the factors’ commission. In the case of any dishonored invoice, the selling company bears the burden. This article highlights the key benefits of using accounts receivable loans to businesses.
Benefits of using account receivable loans for business
Smooth business operations
The business is not interrupted by cash flow issues if it has some outstanding invoices that are from creditworthy clients. It gets into an arrangement with a factoring company and gets the needed cash against those invoices. In this way, business operations run smoothly. Customer loyalty and the positive image of the business are maintained. Business is also able to concentrate on its core activities, be it production or whatever it is, without having to spend a lot of time dealing with financing issues.
Collateral free and convenient
The accounts receivable factoring does not require collateral in the form of business assets such as ownership document for land or vehicle. This makes it an easy financing method for small businesses without many assets to fix as collateral. It is also convenient as it involves the factoring company obtaining copies of outstanding invoices and delivery documents to support the invoices.cash is advanced as per the agreed discounting rate after the financing company conducts some due diligence. Cash may be availed in a period as short as 48 hours.
Great bargain for obtaining financing
Invoice factoring has a low cost compared to most financing options like bank loans. The amount charged by the factoring company is quite low considering the trouble of collecting the debts is transferred to them, and money is availed upfront. The rates of this method also differ from one factoring company to another hence the company seeking finance can shop around and get a good deal. Business may also get good margins by meeting sudden demands which it may not have managed to meet if it did not use invoice factoring. This further lowers the cost of finance.
Business has free cash for other needs
Businesses may employ invoice factoring to service its next order thus having some free cash that it may put into capital expenditure whose returns are not immediate or not realized in the short term. Also, businesses have free cash to meet some needs that may not have been foreseen. These include court cases, sudden employee demands or marketing campaigns to counter competitors.
Generally, accounts receivable loans are a great financing option because it allows firms to operate smoothly without cash problems and it does not require collateral. The method is convenient and cheaper and allows business to have free cash for emergencies.…