In the simplest terms, the definition of accounts receivable is money owed to a business by its debtors. If your business is the type that generates regular accounts receivable, then you may be able to turn these unpaid invoices into fast working capital for your company. Here are just some ways to tell if accounts receivable financing is right for your business.
Does Your Business Have Accounts Receivable?
It may seem obvious, but for AR financing to be a viable option for your small business, you need to have a substantial amount of accounts receivable. Having only one or two unpaid invoices is not enough for factor companies, who are the establishments buying your owed debts. Many factor companies want you to sell large batches of invoices or all the invoices from one customer. If your main business operations do not generate many monthly invoices, this type of financing may not be the most suitable for you.
Do Your Customers Have Good Credit?
One of the appeals of factoring, which is another term for accounts receivable financing, is that generally the creditworthiness of your customers is considered more important than your own. This makes this type of financing ideal for newer companies without much-established credit who may find it hard to be approved for other types of financing such as loans. If your customers have good credit and regularly pay on time, then selling their invoices could help you get paid faster than the net 30 days regularly associated with invoice payments.
Do You Have a Solid Understanding of Your Financial Needs?
Finally, just like doing business with a bank or other lending agent, AR financing comes with its own terms and fees. It’s critical that you have a clear understanding of any and all terms associated with your factoring agreement, as well as any services the factoring company does or doesn’t include. Do they handle collections? What is the discount rate? Are there any additional charges? Before deciding to sell your invoices, make sure the terms work for your individual business needs.
As a small business owner, you’re bound to run into situations that require outside funding. It may be a slump in business or a boom in growth that is outpacing your current working capital. Either way, if your business turns over a large volume of customer invoices, those customers have good credit and you clearly understand your own business finance needs, then accounts receivable financing could be a quick and easy way to get that much need cash.