The Benefits of Accounts Receivable Financing

Small business loan application

Small businesses, those employing fewer than 500 people, employ more than half of the American workforce. There are more than 28 million of them in the U.S., and they are owned by average Americans in all parts of the country. While every American small business is different from the other 27,999,999, most of them do share one commonality: financial challenges. About half of American small business owners use personal credit to finance their companies, and 63% take out small business loans solely for the purpose of improving cash flow.

One method for improving cash flow is accounts receivable financing. As the most liquid assets any firm holds, accounts receivable make excellent security for short-term loans. Accounts receivable financing is based on the use of the borrower’s accounts receivable sales to secure short term loans. Technically, it’s a form of asset-based lending, but it uses an organization’s accounts receivable in lieu of the typical combination inventory, equipment, receivables, and other assets.

Often, accounts receivable financing is confused with factoring. Though both use receivables to obtain immediate cash flow and are considered transitional sources of factoring, accounts receivable financing is based on the receipt of a loan rather than sale of receivables to a third party.

Accounts Receivable Financing vs. Factoring

  • Accounts receivable financing is generally less expensive than factoring.
  • The borrower maintains control of customer relations and is responsible for collecting invoices with accounts receivable financing. With factoring, the factor is responsible for invoice collection.
  • For accounts receivable financing, the fee paid is a percentage on the amount of the usable credit line. For factoring, the fee is based on the value of the total invoice.

Who Can Benefit from Accounts Receivable Financing?

Any company looking for short-term financing may find accounts receivable financing valuable. It is particularly useful for organizations requiring urgent cash to stay open, for businesses who cannot obtain unsecured credit, for companies needing higher lines of credit than they can get from banks, for organizations needing sort-term increases to fund expansion, and for businesses experiencing major payment delays from a major customer.

Because accounts receivable financing is based on very fluid assets, it has become very popular in the current economic climate. Businesses and organizations across the country are finding major benefits from accounts receivable financing. Could it help your business, too?

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