Monday, March 4, 2013, AM | 9 Comments
Small and mid-sized businesses are often short of cash. However, with the ever increasing business pressure, they are in desperate need of money most of the time. Owing to this very reason, small businesses and companies often seek the services of a financial institution to get a loan sanctioned and processed.
So, are you a business owner in dire need of money in order to make employee or vendor payment? Account Receivable Financing can serve your purpose well.
The idea behind accounts receivable financing:
The concept behind Account Receivable Financing is somewhat simple. It involves borrowing money against a company’s receivables or in certain cases, selling the receivable amounts to a company or individual to receive payment which is similar to the invoice that is due to you, minus the discount.
Discounts given on Account Receivable Financing vary on the basis of the nature of the business and the performance of the industry. It also depends on the amount of the overall risk associated with the process that the financing company has to undertake in order to receive the due amount.
The benefits of undertaking account receivable financing:
The basic advantages of Account Receivable Financing are as follows:
It allows you to enjoy the advantages of a steady cash flow without any hitches.
It negates the possibility of being harassed in order to get a loan.
The usefulness of such a loan can truly be realised by companies that get large invoice payments from clients.
Such type of financing can also help increase the working capital that the company is operating on.
There are various businesses which have their funds blocked up in the inventory. Invoices help them encash the payments quickly.
If you are able to factor the place where you are selling the invoice then you can remove the additional pressure of tracking down the clients in order to receive the payments.
This could very well add to the advantage of the company; if the company applying for Account Receivable Financing is a small or mid-sized firm, then operating with a limited budget can be of great help.
The costs associated with the process:
According to experts, invoice financing fees mostly range between 1% and 3% per month. This however depends on the nature and volume of the overall transaction the monthly payments and the credit worthiness of the particular firm. The fees also depend on the nature of the transactions.
Is this the right choice for your organisation?
Basically such financing is apt on the basis of the industry, especially for industries like government contracts or the staffing service industry.
That is why when you look for such financing options, you should make sure that you perform some detailed research.
This can be done by going through the company’s website and asking them if they handle such transactions.
You should also make sure that your need is temporary and immediate. Such financing is not really meant to buy time so that the inevitable can be delayed.
Even though it would be one of the most suitable options to get your immediate needs addressed, you also need to make sure that you use it in a proper way in order to avoid any hitches or future hazards.
James Hopes is a business analyst and helps derives strategies for smooth cash flow of various business activities.