Is Accounts Receivable Financing Right for You?

Blog
Is Accounts Receivable Financing Right for You?

Is Accounts Receivable Financing Right for You?

If your business ever has difficulties with cash flow, you may be interested in getting financing to help you ensure smooth operations. However, while there are a lot of financing options, many are not available to businesses with less-than-perfect cash flow. If this sounds familiar, you should consider accounts receivable financing as a possible option for your business.

What Is AR Financing?

AR financing is a form of financing in which the lender gives you money for your active accounts receivable then collects from your customers. This can be structured as a loan secured by your invoices or as a sale of your invoices to the financing company.

This allows you to tap into the money that you are owed by customers without having to wait until they settle their balances. Typically, the financing company will charge a fee as a percentage of each invoice’s value.

Since there is a clear asset being used in the transaction, AR financing tends to be much more accessible than credit-based financing. In fact, many businesses that are having a hard time getting loans can benefit from this option because it is based more on the customers’ credit histories. If you have reliable customers, you can likely get financing.

When Is AR Financing Useful?

While AR financing is often associated with companies that have a hard time getting funding through other means, this isn’t the only applicable use. Some businesses like to use this type of financing to simply avoid having to wait to get paid. They can start investing in their growth as soon as they invoice their customers.

If you are running a business that invoices customers and gives them time to pay, you may be able to benefit from AR financing. Typically, having numerous, consistent invoices sent to reliable customers will get you’re the best possible terms for financing.

What Are Recourse and Non-Recourse Financing?

It is important to know that there are both recourse and non-recourse options for AR financing. In the case of the former, if your customer doesn’t pay, you will have to buy back the invoice from your financing company. In the case of the latter, you do not have this obligation. Typically, recourse financing is less expensive due to the reduced risk for the provider.