Businesses have many options open to them when it comes to financing. Receivables define the amount that is owed to businesses, including outstanding invoices. These invoices are seen as assets for businesses, and in a receivables financing agreement, the amount of the outstanding invoices can be borrowed. Essentially, businesses can receive payment on their outstanding invoices early, so that their cash flow is not impacted.
Different Types of Financing
Traditional commercial lending, otherwise known as asset-based lending (ABL), is a method that will often incur fees for businesses. Companies are required to commit most of their receivables and have little control over which ones will be used.
Traditional factoring refers to the way in which a business sells its accounts receivable to a funding organization. The initial payment from the funder will be less than the full amount of the receivable. Businesses have more control over this method and can choose which receivables they want to trade.
Selective accounts receivables is a method that can be chosen, and it offers businesses more flexibility over which receivables they choose to use to secure early payment. This form of receivables financing also allows companies to be paid the full amount for the receivables that they sell. The method is often seen as one of the most popular choices as rates are low compared to other methods.
Benefits of Receivables Financing
Receivable financing, or AR loans, is a way for businesses to obtain finance without the need to offer collateral. This means that guarantors or assets are not required, giving businesses more flexibility when it comes to their funding options. Businesses aren’t required to part with a percentage they own to secure financing, which means they can retain the full amount of the business that they own. This form of funding doesn’t create any additional debts for businesses, so there is less in choosing this finance option.
Why many companies choose to finance their receivables
Today’s unstable economic climate has caused many businesses to pursue alternative ways of obtaining finance. These companies are on a quest to secure the capital needed to stay afloat and also to sustain positive business performance.
Factoring, and accounts receivable financing, are two of the most popular options when it comes to ways of securing extra cash for businesses. Although these two methods are linked, there are some small differences between them.
What is the difference between factoring and accounts receivable?
Factoring, requires that a businesses sells their outstanding accounts to a commercial finance company known as the “factor.” The factor will then provide a cash advance, which can be up to 90% of the value of the receivable. Once an invoice is collected, the balance is then released to the business.
Businesses are able to choose which invoices they wish to sell, under a factoring contract. Once the invoice has been purchased by the factor, they manage it until it is paid in full. This means that the factor is essentially the credit manager, from this point on.
When it comes to accounts receivable, this often looks more like a bank loan, but does have some important differences that should be considered. Accounts receivable does not require that businesses need to have collateral to ensure funding. This form of financing uses the assets, associated with accounts receivable, as collateral.
Accounts receivable and factoring are both popular choices for businesses. As more and more businesses require some form of financing, many are choosing to finance or factor their receivables, so that they can ensure they have enough cash to carry them through difficult times. This form of financing is seen as a transitional method. It enables businesses to ensure the stability of their cash flow, at times when they are unable to access traditional financing options like bank loans.