How Small Businesses Can Benefit From Receivables Financing

Small businesses can benefit greatly from receivables financing. It gives them an opportunity to raise capital without having to depend on a bank loan or other sources of debt. Receivables financing allows companies to utilize the resources they have already, managed to develop, mainly their clients, to generate capital.

Companies that bill their companies (via receivables or invoices) often have to wait between one and three months before they are paid, for jobs they have already completed. Money has already been invested in these jobs in the form of materials and personnel. The problems is that a company is not able to recoup these costs for some time because the invoice their clients. This can cause financial problems. A business may begin to experience cash flow problems. If these problems become severe enough and executives can not find a way to infuse capital into the business, they may be forced to shut the company’s doors. That is, of course, if they are unable to find a suitable method to generate cash. Receivables financing is one option.

When a company utilizes account receivables financing, they are essentially selling their outstanding invoices for immediate cash. Instead of waiting 30 to 90 days for their clients to pay their bills, they will be able to generate capital in a matter of days, sometimes as little as 24 hours. Factors are companies that purchase quality receivables. If a company has clients with excellent or even very good credit, chances are that they will be able to find a Factor wiling to buy them. They are uniformly purchased at a discounted rate, typically 10% to 30% less then what they are worth. The remainder of the invoices’ value will be received by the company that sold them, after the Factor collects them.

After the Factor purchases the invoices, all outstanding payments are made to them. The original payment arrangements will remain the same. After the invoices have been paid, all monies go back to the company that originally owned them, that is except for the Factor’s fees and any money that already went toward the purchase of the invoices.

While accounts receivables financing isn’t for every company, it is a great option for many. Businesses that invoice their clients but can’t afford to wait 30 to 90 days to receive payment may find that this sort of commercial financing is exactly what they need to keep their doors open or to invest in their growth. It allows them to do both without taking on risky debt or jumping through hoops to generate the necessary capital.